With the Australian Taxation Office (ATO) encouraging rental property owners to be vigilant when preparing their annual income tax assessment in 2015, it’s important that investors understand the depreciation deductions they are eligible to claim.
Depreciation continues to be an area that investors find complicated and many investors lack the knowledge of complex tax legislation necessary to accurately assess what deductions they are entitled to. This can often lead to investors failing to maximise their depreciation deductions and a potential audit if incorrect claims are made.
To assist rental property owners, below are four must-know points about property depreciation. These points include a depreciation checklist for 2015 and will assist investors to understand some of the rules and terminology behind claiming property depreciation.
1. What is property depreciation?
As a building gets older and the items within it wear out, they depreciate in value. The ATO allows property investors to claim depreciation deductions related to the building structure and the plant and equipment items contained within any income producing property.
2. What is deductible under the capital works allowance?
A capital works allowance can be claimed due the wear and tear of the structural elements of a building. Examples of some of the structural items which can be claimed are below:
Deductions for these items are based on the historical costs of the building, the construction date and the type of property.
Residential property owners can only claim the capital works allowance at a rate of 2.5 per cent for properties in which construction commenced after the 15th of September 1987, while commercial property owners can claim capital works allowance at a rate of 2.5 per cent or four per cent dependent on the property type and construction commencement date.
The below chart provides a visual explanation to help investors work out the relevant capital works entitlement for their property type.
3. What are plant and equipment assets?
Plant and equipment assets are the mechanical and removable assets contained within an investment property. The ATO has identified more than 1,500 items that rental property owners can claim as depreciable plant and equipment assets.
The depreciation for these assets will be calculated based on the individual effective life of each asset as set by the ATO. The checklist below lists some of the plant and equipment assets found in most investment properties.
To find the depreciation rate of any depreciable asset, BMT Tax Depreciation has developed Rate Finder, a free app available to download here. Search by asset name or industry type within the app.
4. How can a rental property owner ensure depreciation is claimed correctly?
Investors are encouraged to enlist the services of a specialist quantity surveyor to arrange a tax depreciation schedule.
Quantity surveyors are one of a few select professionals recognised under Tax Ruling 97/25 with the appropriate knowledge for calculating construction costs for the purpose of building depreciation.
A specialist quantity surveyor is likely to ask a property owner to supply the following information when they call to arrange a depreciation schedule:
A specialist quantity surveyor will perform a site inspection of the property when arranging a depreciation schedule. By doing so, they may identify plant and equipment items which may otherwise have been identified as capital works, thus increasing the rate at which items within the property can be depreciated.
In commercial properties, quantity surveyors will ascertain which items can be attributed to the owners’ deductions and to their tenants, as tenants are also entitled to claim depreciation deductions. They will also ensure that the correct deductions are applied for assets dependent on the type of commercial property, as the effective life of assets in commercial properties vary significantly industry to industry.
By arranging a depreciation schedule, the owner of the property can rest assured knowing that the correct and maximum deductions can be claimed. The schedule will outline all of the deductions available for the owner’s Accountant and provide evidence to support the owners claim should the ATO complete an audit.