As tax time approaches, property investors generally prepare all of their receipts and documents ready to either lodge their tax return online or visit their accountant.
Many investors do so with the thought in mind that this is all that is required in order to claim all of their available deductions.
Unfortunately for many investors, this can result in them failing to claim the maximum deductions available from their property, as often they are unaware that they are entitled to make a claim for the depreciation of the building and the assets contained inside.
Of the 2.8 million property investors who claimed deductions relating to their rental property during the 2012-2013 income year, just one million claimed capital works deductions, whilst two million claimed plant and equipment deductions.
The average deduction for capital works deductions during that financial year was $2,113, whilst the average claim for plant and equipment assets totalled just $1,179. This means that on average investors only claimed a total of $3,292 in depreciation for their properties during the 2012-2013 income year.
While many of you may think these are quite generous deductions, when you consider that the average deduction BMT Tax Depreciation found for our clients during the 2012-2013 income year for both capital works deductions and plant equipment was $9,076, it is clear that many are missing out and there is room for property investors to improve the returns they receive when they lodge their annual income tax assessments.
Many of you may now be wondering "what is a quantity surveyor and how do these professionals play such an integral role in ensuring your tax return is maximised?" You might also be asking "how can I ensure I claim the extra $5,784 that the average investor may be missing out on?" Let’s take a look at some important factors which answer these questions.
What is a quantity surveyor?
A quantity surveyor is a qualified professional who specialises in building measurement and estimating the value of construction costs. While quantity surveyors can use their skills throughout the various stages of the construction process of a building, some use their specialised skills to complete tax depreciation schedules.
A quantity surveyor's ability to estimate construction costs for depreciation purposes are also recognised under tax ruling 97/25. This means they are one of only a few professions who are actually able to put together the schedule that outlines available deductions for you.
What is a depreciation schedule and what can you claim?
A depreciation schedule is the document which outlines all of the deductions an investor can claim for both capital works and plant and equipment.
Capital works deductions represent the claims available for the wear and tear that occurs to the building over time. Investors can claim deductions for any residential property in which construction commenced after the September 15, 1987.
Unlike the building structure, there are no age restrictions on claiming plant and equipment items. These items, which also experience wear and tear, can be claimed over an individual effective life as outlined by the Australian Taxation Office. This means any property, no matter what age, will entitle its owner to claim some deductions.
Deductions are also available for any renovations which may have been completed within the legislated dates, even those completed by a previous owner of the property. For those who have invested in older properties, it is always worth checking to see what deductions are available. More often than not, a structural addition has been completed and these can entitle the owner to claim capital works deductions.
Once I request a depreciation schedule, what will a quantity surveyor do?
As part of arranging a tax depreciation schedule, a specialist quantity surveyor should always perform a detailed site inspection.
This will allow them to take notes about any new additions which may have been made and photograph any of the plant and equipment assets contained in the property. A site inspection is a vital step which can have a significant impact on whether you receive an average claim for plant and equipment versus the maximum deductions available.
To organise the inspection, a quantity surveyor should do all of the work of getting in touch with the property manager and arranging a suitable time to visit with your tenants. A quantity surveyor who specialises in depreciation will take any hassle of the organisation involved away and complete this for you.
What should a depreciation schedule include?
When you order a schedule and receive the document, ensure that it provides an overview of the deductions using both the prime cost and diminishing value methods and that the report lasts for 40 years.
Ask your quantity surveyor if they incorporate methods such as immediate write-off and low-value pooling which allow plant and equipment depreciation to be maximised when using the diminishing value method.
If you own the property with a friend or colleague, also ask if you can get a split report where deductions are calculated based on each owner's percentage of interest in the items contained in the property.
A schedule should be tailored to your individual needs so that it has the best outcome for your situation.
The most important piece of advice is always to ask your specialist quantity surveyor questions. They are more than happy to assist you in any way in the lead up to arranging a schedule and they can even provide a full assessment of the available claims before you proceed with organising your schedule.
At the end of the day, it is with the investor in mind that deductions should be outlined and claimed. Depreciation affects your cash flow, so ask the experts to help you improve it.