It’s easy to see Australians have a passion for property renovation. All you need to do is switch on the television and you’ll find evidence in the number of home shows dominating our screens.
Statistics agree. More than $500 billion was estimated to have been spent on alterations and additions to Australian residential buildings in 2013, according to the Australian Bureau of Statistics.
With shows like The Block inspiring renovators, here are some must know facts for property investors to help them understand depreciation and ensure the maximum deductions are claimed, particularly when a renovation is involved.
1. Claim depreciation for older properties
One common misconception investors have is that they cannot claim depreciation on older properties. This arises due to limitations the Australian Taxation Office (ATO) places on eligibility for capital works deductions (depreciation for structural components of a property). ATO legislation advises that owners of residential properties in which construction commenced prior to the July 18, 1985 cannot claim capital works deductions. However, depreciation of plant and equipment is not limited by age. It is the condition and quality of each item which contributes to the depreciable amount. Therefore, even owners of older properties can claim some depreciation.
2. Claim depreciation for renovations completed by a previous owner
Often when an investor purchases an older property, at some stage since the building’s original construction, renovation work may have been completed.
Although the ATO restricts property owners from claiming capital works deductions for properties constructed prior to the July 18, 1985, they may be able to claim capital works for renovations completed after this date even if the work was completed by a previous owner.
Quantity Surveyors will discover any previous renovations, even less obvious ones like new plumbing or electrical wiring, during a site inspection of the property.
3. Get a depreciation schedule prior to renovation
Renovations can provide deductions over and above those received during a normal depreciation claim. This is because the owner may be entitled to claim a deduction for any depreciable assets removed and disposed of during a renovation. This process, called ‘scrapping,’ allows investors to claim the remaining depreciable value for assets removed as a deduction in the year the item is scrapped.
The site inspection and tax depreciation schedule must be completed before any items are removed and work begins in order to allow the Quantity Surveyor to take photos and value the items contained within the property.
4. Install assets that maximise future deductions
Selecting which assets to replace during a renovation can make a difference to future deductions. This is because each asset’s depreciable value is calculated based on its individual effective life.
For example, deductions available in the first full year depreciation claim for carpets, floating timber floors and tiles differ. If an owner has decided to install new flooring to the value of $2,000 but is unsure as to which flooring type to install, the deductions that become available afterwards may assist their decision. By choosing to install $2,000 in carpets rather than floating timber or tiles, the owner will be entitled to claim $400 in depreciation deductions in the first year. This compares with $267 in depreciation from floating floorboards or $50 in depreciation from tiles, based on a full financial year.
5. Update your schedule after the renovation is complete
A second tax depreciation schedule should be prepared after a renovation to show any removed assets identified in the original schedule and the remaining depreciable amount that can be claimed for these items as an immediate deduction. The new schedule will also detail depreciation deductions available for all newly installed plant and equipment assets or capital works expenditure as well as the depreciation deductions for any original assets remaining for the life of the property (40 years).
Whenever an investor considers renovating an investment property, consider these factors and if unsure, consult with a specialist Quantity Surveyor for advice.