Owners of income producing properties are eligible to claim tax deductions for a number of expenses involved in holding a property, but all too often investors are unaware of property depreciation.
As such, they frequently miss out on the valuable returns these deductions can provide.
To help investors maximise their deductions, here are some key points on depreciation:
What is depreciation?
Over time, any building and the assets contained within it will experience wear and tear. Legislation allows the owners of any income producing property to claim this wear and tear as a tax deduction called depreciation. Unlike other expenses involved in holding a property, such as repairs and maintenance for instance, an investor does not need to spend any money to be eligible to claim it. For this reason, depreciation is often described as a non-cash deduction.
Types of depreciation deductions available
The Australian Taxation Office (ATO) clearly defines two types of depreciation allowances available for property investors:
- Division 43 capital works allowance
- Division 40 plant and equipment depreciation
The capital works allowance refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.
As a general rule, any residential building where construction commenced after 15 September 1987 will entitle their owner to capital works deductions at a rate of 2.5 per cent per year for up to 40 years.
Plant and equipment depreciation* refers to the deductions an investor can claim for the wear and tear that occurs to the easily removable fixtures and fittings found within the property.
There are more than 6,000 different assets recognised by the ATO which an investor can claim depreciation deductions for. Some examples include the carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans.
Unlike structural items, no date restrictions apply when claiming depreciation on plant and equipment assets. Each of the assets is assigned an individual effective life and depreciation rate by which depreciation should be calculated.
*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9 May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. Investors should note that these changes are not yet law, as the legislation still needs to be passed through the senate for confirmation.
Who should you contact to calculate and maximise your deductions?
An investor will often make the mistake of thinking their accountant will claim all of the deductions available in their investment property. When it comes to depreciation, however, it is important to consult an expert in this area.
Legislation recognises quantity surveyors as being one of a few select professionals with the knowledge necessary to estimate construction costs for depreciation purposes.
A specialist quantity surveyor will use their skills to provide a depreciation schedule that outlines the deductions an investor can claim for any specific property at the end of each financial year. An accountant will then use the figures outlined in the depreciation schedule when submitting the investor’s individual income tax return at the end of financial year.
How will depreciation help an investor?
The additional funds an investor receives by claiming depreciation can have a significant impact on their available cash flow. On average, an investor can claim between $5,000 and $10,000 in depreciation deductions in the first full financial year.