Despite the significant difference it can make to cash flow, depreciation is one of the most commonly missed of all available tax deductions among property investors.
Statistics from the Australian Taxation Office (ATO) suggest that only 30 per cent of property investors claim depreciation for the available capital works deductions, and 19 per cent claim the depreciation of plant and equipment assets.
So why do so many miss out? Here are some of the main reasons:
1) A non-cash deduction
One reason why investors fail to claim depreciation is because they don’t need to spend any money to be able to claim it. As a non-cash deduction, investors are often unaware that depreciation deductions are available to them for the wear and tear of the existing building structure and the plant and equipment assets contained within the property.
So long as a property is income-producing, investors will be entitled to claim some depreciation deductions. The fee involved in arranging a tax depreciation schedule is 100 per cent deductible, an additional benefit for investors who enquire about the deductions available for their residential or commercial investment property.
2) Investors think their property is too old
Investors often assume they’re ineligible to claim depreciation due to their property’s age. This misunderstanding arises due to restrictions the ATO place on the capital works component of a property.
ATO rulings state that the owner of any residential property in which construction commenced prior to the 18th of July 1985 will not be eligible to claim capital works deductions. For commercial buildings, this date is the 20th of July 1982. Yet the depreciation of plant and equipment assets is not limited by age; it is the condition and the quality of each item which contributes to its depreciable amount.
Properties built prior to 1985 see investment property owners claiming an average of $4,042 in annual depreciation deductions in the first five years, so it is definitely worth arranging a tax depreciation schedule. This schedule outlines all of the claims the owner can make when their annual income tax assessment is performed by an Accountant or their Tax Advisor.
3) Claims for plant and equipment items may not be maximised
A significant number of property investors submit incorrect claims for the plant and equipment assets contained within their investment properties when they choose not to get a depreciation schedule or choose to submit self-assessed claims at tax time. This may be because claims for assets are missed altogether or are even claimed incorrectly as capital works deductions, resulting in lower depreciation deductions.
Specialist Quantity Surveyors identify a large portion of available deductions through plant and equipment depreciation. On average, 15 per cent of the total construction cost of a residential property is made up of plant and equipment assets. This includes items such as carpets, hot water systems and light fittings as well as less obvious items such as garbage bins, mechanical exhausts and door closers. These items are rarely the same age as the building and are usually replaced or updated over time. The greater the number of plant and equipment items identified in a property, the higher the depreciation claim.
By arranging a tax depreciation schedule, investors can rest assured that claims for all depreciable assets are included and calculated correctly based on each asset’s individual effective life and depreciable rate as set by the ATO.
4) Owners are able to claim previous renovations
Another important role Quantity Surveyors play in maximising depreciation claims is identifying any additional works, extensions or internal refurbishments which have taken place over the life of the property. Even work completed by a previous owner can be claimed. Structural renovations can be claimed as capital works deductions so long as these additions have been completed after the ATO qualifying dates. Newer plant and equipment assets are likely to have a higher value and can be depreciated from the date the asset is installed ready for use in an income producing property for the full effective life of the asset.
Example depreciation deductions:
The following table provides investors with some real examples of the depreciation deductions found by a specialist Quantity Surveyor:
Whether a property is new or older, depreciation deductions make a difference to an investor’s cash return, so make sure to ask an expert to maximise your claims.