The Australian Taxation Office (ATO) will be paying close attention to the deductions claimed for investment property owners this tax time, with one area of their scrutiny to be focused on those who share ownership and split rental incomes and deductions.
Co-ownership of property is become increasing common in Australia due to increasing property prices. Purchasing a property with a friend, a family member or business partner allows property investors to increase their buying power as combining incomes and savings improves borrowing capacity while at the same time enabling both parties to reduce the burden of the corresponding expenses involved in holding the property.
While many investors are aware that co-ownership makes it easier to invest in property, often they are unaware of how this will affect the deductions they can claim.
Owners of all types of income producing properties can claim depreciation deductions due to the gradual wear and tear which occurs to both the building structure and the plant and equipment assets contained within the property.
To ensure that depreciation claims are correct and maximised, investment property owners are encouraged to speak with a specialist quantity surveyor to request a tax depreciation schedule for their property. If a property has more than one owner, choose a depreciation schedule provider that outlines deductions based on each owner’s percentage of ownership in each individual asset.
Owners often don’t seek adequate professional advice and this can lead to depreciation deductions being claimed incorrectly for co-owned properties. Frequently I see examples where depreciation has been calculated first and then the deductions are split based on ownership percentage. By splitting an asset's value by ownership percentage first, each investor potentially will qualify for higher depreciation deductions.
Split schedules enable co-owners to increase deductions for plant and equipment items earlier in their effective lives using depreciation methods such a low-value pooling and immediate write-off. Let’s take a look at each of these methods and explain how these should be calculated for assets which are found within a property with a 50:50 ownership split.
Low-value pooling is a method of depreciation which allows an investor with an ownership interest in an asset of less than $1,000 in value to claim deductions at an accelerated rate of 18.75 per cent in the year of purchase and 37.5 per cent each year after that. As each investor’s ownership interest may qualify for the low-value pool, co-ownership expands the number of items that can be claimed at this higher rate of depreciation.
Legislation allows property investors to claim an immediate write-off for assets with an opening value of $300 or less. In a situation where ownership is split between one or more parties, the rule allows investors to claim an immediate write-off to items where an owner’s interest in the asset is below $300.
The table below demonstrates the impact a split depreciation schedule will have for assets found within a kitchen of an investment property which has two owners.
In a situation where depreciation deductions are calculated first and then the ownership split applied, each owner can only claim $365 in deductions in the first financial year for these assets.
By comparison, the split depreciation schedule will find $617 in deductions for each owner. That’s an additional $252 in deductions for each owner. In the second year, the claim per owner will improve from $343 to $519 for each owner.
These increases in deductions are made especially significant when considering that this example only accounted for two assets, a small portion of the assets typically found in an investment property.
A split depreciation schedule is available in any scenario where an investment property is co-owned, whether it is for a husband and wife, friends or business partners.
The deductions using a split schedule can also be calculated based on any number of investors and the percentage of ownership each individual has in the assets, whether it’s for two owners at 60:40 or 1:99, or even four owners at 70:15:10:5.
For owners with lower percentages of ownership, the low-value pool and immediate write-off will apply to more assets, increasing deductions earlier. This is particularly important for investors to understand when entering into a co-ownership agreement and at the time of purchase. For example, a husband and wife might choose to align their percentage of ownership so that the higher income earner holds the greater portion of interest in the assets and therefore that person will be able to claim a higher portion of the deductions at tax time.
It’s important to note, however, that once an investor has requested a split depreciation schedule, they cannot change their interest in the assets within the property down the track. Depreciation must always be claimed at the percentage of ownership split that is outlined on the original schedule from settlement.
A depreciation schedule from a specialist quantity surveyor can also be used as evidence for the amounts claimed for each owner should the ATO perform an audit of their income tax return.
Investors who would like more information about obtaining a split depreciation schedule should speak to a specialist quantity surveyor for advice. They should also speak with their accountant and financial advisor before entering into any co-ownership agreement.