Around 1.8 million Australians, or 8 per cent of the population, own an investment property. These properties provide a number of tax benefits to their owners as they are eligible to claim deductions for expenses such as interest, rates, property management fees, repairs and maintenance and depreciation.
Of all of the deductions available, depreciation is usually the one most often missed by investors. Research suggests that 80 per cent of investors fail to claim the maximum deductions from their investment properties.
Depreciation can be a complicated topic and even a basic understanding can help investors to increase their deductions, improve their available cash flow and get more out of owning a property. With this in mind, below is a comprehensive guide to help investors with what is considered depreciable in an investment property and to help them maximise their claims.
What is property depreciation?
As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a deduction. Depreciation can be claimed by the owner of any income producing property.
What types of deductions can you claim?
There are two basic types of depreciation allowances available for investors to claim. These are capital works deductions and plant and equipment depreciation.
Capital works deductions refer to the deductions available for the property’s structure. Examples of some of the structural items an investor can claim include the walls of the building, the roof, doors, windows, tiles, kitchen cupboards, toilets and baths. Deductions for these items will be calculated based on the historical costs of the building, the construction date and the type of property.
Residential property owners can claim capital works deductions at a rate of 2.5 per cent per year for a maximum of forty years. However, there is one restriction, legislation states that owners can only claim the available capital works deductions on any property in which construction commenced after the 15th of September 1987.
When calculating depreciation for commercial properties on the other hand, capital works deductions can be claimed at either 2.5 or 4 per cent, depending on the construction completion date and the purpose of the buildings use. As a general rule, most non-residential property owners can claim capital works deductions for properties in which construction commenced after the 20th of July 1982.
Despite the commencement date restrictions, it is important that owners of older properties don’t assume they won’t receive any capital works deductions. Often older properties have undergone a renovation and any work completed within the legislated dates can entitle the owner to capital works deductions, even if work was completed by a previous owner. It is worth making an enquiry on any property.
Plant and equipment deductions don’t have the same date restrictions that apply to items classified as capital works. These items are the easily removable fixtures found within a property. Examples include carpets, blinds, ovens, air conditioners, hot water systems, door closers, dish washers and even shower curtains, smoke alarms and garbage bins. The ATO recognise over 1,500 depreciable assets so it is not uncommon that deductions for these items get missed.
When calculating depreciation for plant and equipment, it will depend on the effective life and depreciable rate set for each asset by the ATO.
How should an investor go about maximising their depreciation deductions?
The most important advice an investor should take is to seek advice from an expert. Often investors will self- assess or assume their Accountant takes care of depreciation for them, which can lead to thousands of dollars in missed deductions. To claim depreciation correctly, an investor should contact a Quantity Surveyor who specialises in tax depreciation.
They can provide a comprehensive tax depreciation schedule outlining all of the deductions available to claim.
As part of the process, a Quantity Surveyor should include a detailed site inspection to assess the property, take measurements and photograph all of the depreciable assets found in the property. Not all depreciation providers do this, so it is important to keep this in mind when sourcing a Quantity Surveyor.
What difference does claiming depreciation make to an investor?
By claiming the available depreciation deductions for a property, an investor is essentially reducing their taxable income. An Accountant can claim the deductions outlined in a depreciation schedule when they complete their client’s annual income tax assessment. Any deductions claimed will come back to an investor at their marginal tax rate.
On average, investors can expect to claim between $5,000 and $10,000 in depreciation deductions in the first financial year alone. The additional funds received from depreciation have the potential to turn what could be a negative cash flow scenario into a more positive one. For property investors the benefits of claiming depreciation are clear. Any additional funds could mean more money in their pocket to help in reducing their loan faster, to budget for a renovation, repairs and maintenance, or even to save for future investment.
What’s even better is it won’t cost an investor a cent to claim deductions correctly as even the cost of a depreciation schedule is 100% tax deductible. You simply can’t lose by making a call to find out what’s available.