As an investor it is important to obtain the maximum tax benefits you possibly can. Depreciation is an allowance to write-down the value of part of your investment property’s fixtures and fittings. It compensates investors for the fact that sooner or later these items will need to be replaced. As I’m not qualified in this area, I’ll defer to the experts to explain this very important part of the book. The following information is provided by BMT Tax Depreciation and Quantity Surveyors. Also, please remember that you should seek your own tax advice; the information in this section is of the nature of general comment only.
What is Depreciation?
As a building gets older and items within it wear out, they depreciate in value. The Australian Tax Office (ATO) allows property investors to claim a deduction related to the building and plant and equipment items contained in their property. Depreciation can be claimed by any owner of an income-producing property. This deduction essentially reduces the investment property owner’s taxable income – yes, you pay less tax!
I highly recommend you have a Depreciation Schedule prepared for your new property. The cost will vary from $300 to $600 plus GST. It can be prepared by a Quantity Surveyor and in the long term, you will benefit enormously. The Depreciation Schedule lists all the items in your new property that are depreciable under current law, and give them a dollar value.
What tax deductions can I claim?
All ATO specified plant and equipment items as well as building write-off allowance (where the building qualifies) can be claimed. Some examples of plant and equipment items include:
- Hot Water Systems
- Cook tops
- Range hoods
- Garage Door Motors
- Freestanding Furniture
- Air Conditioning
Plant and equipment items are basically items that can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items include mechanically or electronically operated assets, even though they may be fixed to the structure of the building. The building write-off allowance is based on historical building costs of the property and includes the bricks, mortar, walls, flooring, wiring, etc.
Why does the Depreciation Report only last 40 years?
From the date of construction completion, the ATO has determined that any building eligible to claim depreciation has a maximum effective life of 40 years. Therefore, investors can claim up to 40 years depreciation on a brand new building, whereas the balance of the 40-year period from Construction Completion is claimable on an older property.
How do you work out how old the building is?
The age of the building can be determined by obtaining council documents with dates pertaining to the original application approval date or the Occupancy Certificate date, and final inspection date. Similar methods are used Australia-wide; however, some properties are privately certified. BMT Tax Depreciation conducts the relevant searches required to accurately estimate the age of a building. These include historical council searches regarding lodged development applications, as well as Occupancy Certificates and Certified Final Inspections.
What do I need to provide for a Depreciation Report?
Information required to produce a Tax Depreciation and Capital Allowance report includes the following:
- The settlement date of your property
- Purchase price
- Access details for inspection (e.g. property manager or tenant details)
- Any information pertaining to improvements or additions made to the property, including dates and costs where available
- The date the property became income-producing (if you have lived in it as your primary place of residence previously).
What does the report contain?
A detailed Depreciation Report includes the following components:
- A method statement
- Schedule of Diminishing Value Method of Depreciation
- Schedule of Prime Cost Method of Depreciation
- Schedule of pooled items for the property
- Lists all Division 43 (10C & 10D) allowances available from the property
- Detailed 40 year forecast table illustrating all depreciable items together with Building Write Off for both Prime Cost and Diminishing Value methods
- Comparative table of the two methods of depreciation
- Common property items within strata or community title complexes such as lifts and swimming pools are included in the depreciation report for a unit in a multi-unit development
- The report is structured to facilitate the client to be able to amend previous years' returns to re-coup unclaimed depreciation benefits
- The report is pro-rata calculated for the first year of ownership based on the settlement date so that the accountant has the exact depreciation deductions for each year.
The report will ensure maximum depreciable items are identified and will take into account the pooling of low value items under the Uniform Capital Allowance System. It is valid for the life of the property (40 years), until capital improvements are undertaken.
As an owner it is imperative to be aware of tax deductions you can claim on your property investment.
As a property manager, it’s extremely important that you have an understanding of tax depreciation benefits as it’s not only a lifelong skill for your own career but it will also be of great value for your owner clients.
You never know, the greater the tax benefits your owners receive may in fact enable them to purchase another investment property for you to manage – now there is some food for thought.