As we see developments become increasingly popular across Australia’s major cities, it is important for property investors to be aware of the significant depreciation deductions they can claim.
This being said, we mustn’t forget about our pre-loved properties which hold substantial deductions for their owners too.
The Australian Taxation Office (ATO) allows owners of both new and old investment properties to claim depreciation deductions on the structural and plant and equipment items found within any income producing property. As a building gets older, structures and items found within a property gradually deteriorate; they depreciate in value. Claiming deductions can result in thousands of dollars being put back in the investor’s pocket each year, significantly reducing their taxable income and increasing their cash flow.
In the 2014-2015 financial year, 38.6 per cent of the depreciation schedules completed by BMT Tax Depreciation were for properties built between 2012 and 2015. Depreciation deductions for the first year alone averaged $12,512, and $91,204 for the first 10 years.
Higher depreciation deductions are usually available on newer properties as they consist of new fixtures and fittings that hold higher residual values than those found in older properties. Despite this fact, we must not neglect older properties. The myth that older properties will not qualify for depreciation deductions is untrue.
In fact, 21.5 per cent of depreciation schedules completed for the 2014-2015 financial year were for properties built prior to 1987. BMT Tax Depreciation found average depreciation deductions of $4,445 in the first year alone and $31,166 in deductions relating to the first 10 years of the properties' age. Properties constructed between 1987 and 2000 were able to claim average depreciation deductions of $7,741 in the first financial year and $57,246 in the first 10 years. As you can see, owners of older properties could be missing out on significant deductions if they don’t claim depreciation.
Older properties have generally undergone some type of renovation in their lifetime. Identifying additional works, extensions or internal refurbishments, even if completed by a previous owner, can dramatically increase deductions. A specialist quantity surveyor will be able to identify and estimate costs of all works taken place.
There are two types of property depreciation which can be claimed: capital works deductions and the depreciation of plant and equipment.
Capital works deductions can be claimed on the structural components of a building, those items which cannot be easily removed. Structural items include retaining walls, driveways and bricks. Plant and equipment assets are classified as ‘easily’ removable fixtures, as are fittings such as dishwashers, blinds and hot water systems. Each individual plant and equipment asset holds an effective life set by the ATO.
Owners are entitled to claim costs associated with the buildings structure (capital works deduction) over a 40-year period. As an example, a relatively new property built five years ago is entitled to capital works deductions for the remaining 35 years of its life. Claiming capital works deductions does however exclude residential properties that were constructed prior to September 15, 1987. Substantial depreciation claims can still be made for properties built after this date.
Depreciation on plant and equipment items are not limited by age and can be claimed by owners of both new and old properties.
Depreciation can be a complex task. For this reason it is important to seek professional advice to ensure all depreciation claims are maximised and comply with ATO guidelines.