There have been a number of reports recently about statistics that have been released by the Australian Taxation Office (ATO) suggesting that low interest rates have led to a reduction in the amount of claims being made for rental properties.
However, there are a number of reasons why the deductions claimed by investors could be lower.
Owners of investment properties continue to remain unaware of depreciation and many owners fail to ensure they maximise the deductions available to them by seeking the advice of a specialist quantity surveyor and obtaining a depreciation schedule.
Owners of older properties in particular are prone to missing out on depreciation deductions. There are a couple of reasons for this.
The first reason could be that they simply are not aware of their depreciation entitlements and therefore don’t claim these deductions. The second reason is that they assume their property is too old to be worth making an enquiry. This could stem from a misunderstanding of tax legislation, as the ATO provides restrictions for the owners of older properties in claiming capital works deductions.
Legislation states that the owner of any income producing property can claim depreciation due to the wear and tear of the structure of the building (capital works deductions) and the plant and equipment contained.
In older properties, capital works deductions are restricted to only those properties in which construction commenced after the 15th of September 1987. This does not mean that older property owners are unable to claim depreciation.
On the contrary, these owners are still entitled to substantial deductions for the plant and equipment assets contained within the property. If any renovations have been completed, they could also still be eligible for capital works deductions as long as the renovations were completed within dates legislated by the ATO, even if these renovations were completed by a previous owner of the property.
To show the difference that depreciation can make for an investor who owns an older property, let’s look at an example scenario:
Trent purchased an older three bedroom house built in 1970 for $500,000 just over one year ago.
Prior to making a depreciation claim, Trent’s investment property was earning a rental income of $490 per week with a total income of $25,480 per annum. Expenses for Trent’s property, including interest, rates and property management fees, totaled $36,738.
Toward the end of the first year of owning his property, this meant Trent’s annual after tax outlay amounted to $7,093 or $136 per week.
After hearing about the benefits a depreciation claim could make to his cash flow from his accountant, Trent contacted a specialist quantity surveyor to complete a thorough site inspection of his property and provide a detailed tax depreciation schedule.
The schedule outlined that Trent would be entitled to a depreciation deduction of $6,000 in the first full financial year for his property. The table below shows Trent’s cash flow position with and without the depreciation claim.
By arranging a depreciation schedule from a specialist quantity surveyor, Trent was able to reduce the holding costs for his property by $2,220. His outlay of $136 per week was reduced to $94.