Maximising cash returns for property investors.
Properties that generate income for the owner are eligible for significant taxation deductions. Of all the tax deductions available to residential property investors and commercial property owners, property depreciation is most often missed because it is a non-cash deduction – the investor does not need to spend money to claim it. A building and its fixtures depreciate whether the owner claims it or not.
Research shows that 80% of property investors are failing to take advantage of property depreciation and are missing out on thousands of dollars in savings.
As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this wear and tear, depreciation, as a deduction.
In order to claim these deductions, investors usually engage a specialist Quantity Surveyor to complete a Tax Depreciation Schedule. This schedule outlines the deductions available on their specific property and is used by the investor’s Accountant when preparing a tax return.
Preparing a Tax Depreciation Schedule
The preparation of a Tax Depreciation Schedule should always include a site inspection where the Quantity Surveyor will take detailed photos and notes documenting sufficient evidence to prepare the report. The report will include a value of each and every qualifying plant & equipment item within the property, the cost of construction at the time the building was built and a projection of the deductions claimable by the owner per financial year over 40 year period.
For one investor who had a tax bill from the previous year, the results were significant:
Their tax bill for $2,600 became a tax cheque for $12,000 just because of the Tax Depreciation Schedule.
It is often a surprise to property investors who own an old building to find that property depreciation will attract significant depreciation benefits for both new and old properties. Property owners who have not been claiming depreciation are able to go back and amend previous returns to claim missed deductions in previous financial years.
The following example shows how property depreciation will increase the cash return on an investment property.
An investor owns a property purchased for $420,000 with a rental income of $490 per week resulting in a total income of $25,480 per annum. Expenses for the property such as interest, rates and management fees totalled to $32,000. Therefore the total deductable loss was $6,520.
By claiming depreciation a specialist Quantity Surveyor was able to turn their negative cash flow position into a positive one, saving them $4,255 for the year.
The following scenario uses the above figures to show this investor’s cash flow with and without depreciation.
Scenario 1 – Without a depreciation claim:
2 – Including an $11,500 depreciation claim:
This investor used property depreciation to go from a negative cash flow position, paying out $79 per week, to positive cash flow, earning $3 per week on the property. Claiming property depreciation saved this investor $4,255 for the year.
Ensuring that each depreciation claim is maximised on any building requires a combination of construction costing skills and thorough knowledge of current tax depreciation legislation.
For this reason, it is recommended for investment property owners to consult a specialist Quantity Surveyor to prepare a Depreciation Schedule before lodging their tax return.
Property Tax Depreciation - 5 important points
Depreciation is the key to increasing cash-flow on a residential property. Here are five depreciation tips to assist property owners.
No property is too old.
- An investment property does not have to be new. Both new and old properties will attract some depreciation deductions. One common myth is older properties will attract no claim. It is worth making an enquiry about any property.
- Previous tax returns can be adjusted when a property owner has not been claiming depreciation or maximising tax depreciation deductions. The previous two financial year tax returns can generally be adjusted and amended.
Deductions are available for 40 years.
From the date construction was completed the Australian Taxation Office (ATO) has determined that any building eligible to claim capital works deductions has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years of property depreciation on a brand new building, whereas the balance of the 40 year period from the construction completion date is claimable on an older property.
Claim renovations completed by the previous owner.
Anything in the property that occurred in a previous renovation can be estimated by a Quantity Surveyor and deductions calculated accordingly. This includes items that are not obvious, for example new plumbing, water proofing, electrical wiring or a pergola. For capital improvements to be eligible for capital works deductions, construction must have commenced within the qualifying dates which are after the 18 th of July 1985 for residential and after the 20 th of July 1982 for commercial buildings.
There are two main areas to a property depreciation schedule: the plant & equipment and the capital works deductions.
Plant & equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Items which are mechanically or electronically operated are considered plant items, even though they can be fixed to the structure of the building. Plant & equipment items include but are not limited to: