So What is Tax Depreciation?
Depreciation is an often overlooked component of property investment despite being a perfectly legal way of minimising taxation.
Failure of Investors to Claim for Property Depreciation.
Most people do not claim for property depreciation because either they do not understand that they are allowed to do so or they do not realise how much money they are missing out on by failing to claim.
Typically the Depreciation deduction that can be claimed for a residential property may range between $2,000 and $15,000 per year. For someone with a top marginal tax rate of 37 cents in the dollar, the effect of tax depreciation is to put between $740 and $5,550 per year back in their pocket in the initial full year of claim alone.
What is Property Tax Depreciation?
Just like a car declines in value, so does an investment property. If the property is being used to generate an investment income, the Australian Taxation Office (ATO) allows the property owner to claim back the decline in building value by way of a Tax Deduction.
The amount of the deduction varies depending upon the date of the original building construction but for eligible buildings is either 2.5% or 4% of the Capital Works Component of the building cost. In addition to this flat rate the ATO recognises that a number of building components (plant and equipment) have a shorter life than say bricks and mortar. Appliances, carpet, air-conditioning, blinds, smoke detectors are just a number of the 'wear and tear' items that have a shorter effective life than the main building structure and as such are granted an accelerated rate of depreciation.
Additionally areas of 'common property' such as corridors and stairways in an apartment block may be proportionally claimed by the Owner as part of their depreciation claim.
Over-all, by utilising the benefits of property Depreciation, the investor can turn what may otherwise be a negative cash flow into a positive cash flow.
How many Years Can be Claimed?
Individual taxpayers who have not previously made a depreciation claim are entitled to amend their previous years of lodgement for up to 2 prior years of ownership plus the current year of claim - a total of 3 years.
Companies or 'registered' entities are entitled to amend their previous years of lodgement for up to 4 prior years of ownership plus the current year of claim - a total of 5 years.
We understand from discussions with our accounting colleagues that under special circumstances, the ATO may consider extending these time frames.
Effectively 'back claiming' may result in an initial deduction of tens of thousands of dollars.
The Use of a Quantity Surveyor
Quantity Surveyors are recognised by the ATO as appropriately qualified professionals for the purpose of preparing Tax Depreciation Schedules (Depreciation Reports). The reason for this is that Quantity Surveyors have expertise in the valuation of construction costs.
In the instance that the original building cost is not available, or renovations and improvements have been made to the property by a previous owner, a Quantity Surveyor will be able to prepare an estimate of the construction cost.
TIPS: Not all Quantity Surveyors specialise in tax depreciation claims and it is recommended 'that the quantity surveyor provide an ATO compliant report that contains the following level of information:-
- A life-time(40year) depreciation schedule that can be used for the life of your property
- Both the Prime Cost and Diminishing Value Methods of Calculation
- A Graph demonstrating the best method of claim
- Utilisation of the benefits of Low-Value Pooling
- A 100% first year claim for Low Value items (that is items under $300)
- A Tax deductible invoice
- A guarantee to provide a FREE report in the instance that the Quantity Surveyor can't find depreciation in the first year of claim equal to 3 times the professional fee.
Additionally it is recommended that the Quantity Surveyor confirm that they are current members of the Australian Institute of Quantity Surveyors (AIQS) and are registered members of the Tax Practitioners Board (TPB).
Why is there such a difference in prices for Tax Depreciation Reports?
There are a number of reasons for the difference in prices for depreciation reports. Some companies specialise in depreciation and want your work and other companies will do the work for a price – so always shop around and compare what you are getting for your money.
At ACP Quantity Surveyors will never seek to be the highest price but rather the best value for money while providing a high-end professional report.
Can I claim Tax Depreciation on an Old Building?
Yes, we guarantee a minimum depreciation claim of 3 times our fee in the first year of claim or our report will be issued FREE of charge.
What parts of a Property can't be claimed?
You can claim tax depreciation for most parts of a building that is related to the creation of assessable income, however there are some exclusions such as the cost of landscaping and retaining walls that do not play an inherent part of the buildings function.
Additionally as an Owner-Builder, you are not entitled to claim for your labour or development profit.
Do I need to hold Receipts?
You only need to hold records for elements of work that were undertaken after the date that you purchased the property. These receipts should be kept on hand in the event that the ATO elects to audit your depreciation claim. For all other work completed by a previous owner, such as the cost of the original building, the ATO will accept the valuation of a Quantity Surveyor.