Maximise Deductions With A Tax Depreciation ScheduleJuly 13 2021
Gleeson Quantity Surveyors & Building Consultants specialise in offering a transparent, in depth and collaborative approach towards the production of accurate and reliable historical, future and current construction cost advice for taxation, insurance, strata and retirement village purposes. We are experts in non-traditional quantity surveying services. We are also experts in Building Consultancy and Defect Management / Inspections with in-house registered building inspectors. We have delivered some of the most complex projects for Client’s all over Australia. Our experience will provide valuable input to any investment, business or personal, often saving you thousands of dollars.
Are you maximising the tax deductions available through your investment property?
With the end of another financial year, it comes that time of year again where we are all starting to tidy up our tax affairs and of course hoping to reduce our tax payable or even increase our tax refund! If you own an investment property, Tax Depreciation deductions will most likely be your largest tax deduction – if done correctly. There are many misconceptions about tax depreciation so let’s run through some frequently asked questions and myths as they most likely will relate to you this tax time.
Am I entitled to the temporary full expensing extension announced in the most recent budget?
Although at the time this article was written the legislation was yet to be formally finalised, it is believed the existing temporary full expensing available to eligible businesses will make it through parliament without too much fuss. Josh Frydenberg announced the Federal Government’s intention that allows eligible businesses to write off the depreciation of assets, without a cap, until June 30, 2023. This legislation entitles almost any investment property owner, when the property is held within an eligible business entity or structure, to claim the full value of new or second-hand (Division 40) assets within the financial year the purchase occurred. You also have to use it, or have it installed and ready for use within 6 Oct 2020 and 30 June 2023. For many astute Investors, this means another year to buy property and reap the tax incentives almost immediately.
What is tax depreciation?
The Australian Taxation Office (ATO) allows investment property Owners to claim a tax deduction on the fair wear and tear on an investment property and it’s fittings. Tax depreciation is essentially a non-cash deduction. You don’t necessarily have to directly incur the expense to be able to claim the deduction, you can inherit deductions upon acquisition of the property (different rules apply for residential properties purchased post 9 May 2017, contact us for more information). Tax depreciation is split into two categories; Division 43 Capital Works Allowances (the building itself) and Division 40 Plant and Equipment (eg. carpets, blinds, A/C, ceiling fans etc.)
Is my property too old to depreciate?I
Depreciation tax deductions are available to residential property Investors whose investment property was built after 15 September 1987, commercial properties when built after 20 July 1982 and any refurbishments/renovations/improvements from 27 February 1992. You do not have to know when these works were done – leave this up to your tax depreciation provider. Depreciation on plant and equipment is also available on all new buildings and all existing properties when purchased prior to 10 May 2017. In summary, 99.9% of investment properties will be entitled to some form of depreciation deduction.
I have held my property for years, so there’s no point claiming depreciation now?
If you are thinking this please remember that the structure of your investment property has an effective life of 40 years! If you have owned your investment property which was built post September 1987 then it is very likely you are missing out on thousands of dollars’ worth of possible tax deductions. Another tip which could save you thousands is that your Accountant can help you claim tax depreciation retrospectively, amending up to the past two financial year tax returns making the most of your depreciation deductions which you may have lost through not claiming. Completely legitimate and the ATO actually encourage you to do this.
But won’t my accountant look after my tax depreciation?
Quantity Surveyors (like those contracted to Archer’s The Compliance Professionals) are recognised by the Australian Taxation Office (ATO) as the most suitably qualified profession to estimate the depreciable expenditure spent on the property prior to your purchase, as well as the value of the fittings and equipment within the property. In accordance with ATO Tax Ruling 97/25 , if your residential investment property, for example, was constructed after September 1987 and/or construction costs are unknown, you must engage a registered and qualified Quantity Surveyor to produce a depreciation schedule. Unfortunately, your Accountant can’t do this for you.
Renovations were completed by the previous Owner so I can’t claim them can I?
This is where we as Quantity Surveyor’s come in to our own and can add serious value. It does not matter if the works were undertaken by a previous Owner, when you purchased the investment property you have also purchased the entitlement to claim depreciation on all of the property’s improvements. We use a trained eye when inspecting the property, draw upon our extensive construction knowledge, utilise historic council records and building searches and we use historical photos of the property as the basis for our calculations. Our experience could save you thousands of dollars.
Most houses 10+ years old will have had works done. The most typical being:
Bathroom – commonly worth up to $25,000
Kitchen – commonly worth up to $30,000
Floor & Wall Tiles – commonly worth up to $10,000
On a 10-30 year old property there is $65,000 right there which you could be missing out on if you didn’t get a QS to do a depreciation schedule for your investment property. If you are about to renovate your investment property it may be worth getting a QS to undertake a pre-renovation inspection. This inspection allows a QS to identify what assets or capital works you are going to demolish or throw out. Did you know that you are entitled to assign a value to these assets and write them off as an immediate tax deduction? It is easy to get narrow minded when renovating as you are wanting to complete the renovation as quick as you can so that you can get a tenant back in paying rent, but a pre-renovation inspection and ‘scrapping report’ can save you thousands which can offset your loss made through the renovation period.
Tax Depreciation isn’t Worth it Due to Capital Gains Tax
A common myth regarding tax depreciation is that Capital gains tax (CGT), which occurs at the disposal of your investment property, negates the savings made through claiming depreciation. The only instance where there is any truth to this statement is if you hold your investment property for less than 1 year as you are unable to claim the CGT 50% discount. People get scared off by the fact that claiming tax depreciation does in fact decrease your cost base. Let’s just look at this on face value for a second, claiming tax depreciation INCREASES YOUR CAPITAL GAIN and enables a LARGER AFTER TAX PROFIT. If that is not enough, the increase in tax you pay at the capital gains event is less than half of the savings you have made through claiming tax depreciation over the life of your investment. Another win is the fact that plant and equipment which equates on average to approximately $20,000 worth of tax deductions is not taken into account within the capital gains calculations.
If I could ask you to take away three key points regarding this myth:
1. The savings you have made through claiming tax depreciation is more than double the increase in tax you pay at the capital gains event
2. It is important to hold your investment property for longer than 1 year so that you are eligible for the CGT 50% discount
3. Claiming tax depreciation increases your capital gain and increases your after tax profit
At the very least it is worth contacting your tax depreciation specialists at Gleeson Quantity Surveyors to have a no obligation discussion regarding your investment property scenario. We guarantee the value of our service and are more than willing to assist.
1300 290 235