Understanding Your Tax Depreciation Reports and Schedule
If you intend to broaden your investment portfolio by turning your attention to property, then you need to make sure that you maximise your returns.
Your revenues may be limited by market forces at play, so you will need to carefully focus on your expenditure to make the effort worthwhile.
Depreciation is one area that needs your careful attention as it can help to reduce your taxable income and improve your cash flow. You can claim certain depreciation allowances on an investment property and use these as a negative gearing factor to give you a better return on your investment. However, you do need to approach this correctly and understand recent changes in tax law that may affect your strategy.
Understanding the Schedule
In order to claim the appropriate amount on your tax return, you will need a depreciation schedule. This document must be structured in a certain way and should only be compiled by a licensed quantity surveyor.
The schedule will be contained within a depreciation report and will list all depreciable assets. These include not only the items of plant and equipment situated within the building but also the building itself. The information within the report can be passed to your accountant who can then include the detail in your tax return, enabling you to claim the correct amount of tax.
Breaking down the Schedule
The schedule can be broken down into two separate areas.
To begin with, you can claim capital depreciation for the building itself and this will include any alterations, improvements or extensions that have been made. If certain rooms within the building have been renovated, these costs can be included, as can certain upgrades outside of the actual structure itself that directly affect the functionality of the building. For example, improvements to a driveway.
The surveyor will need to take into account a variety of different factors when calculating capital depreciation for your depreciation report. Rate calculations will depend on the date of construction and the type of building as well.
Plant and Equipment
Plant and equipment depreciation will cover assets that are contained within the property and that will typically reduce in value over time. There are hundreds of individual categories here and the quantity surveyor will create a painstaking list as part of the schedule. Items like kitchen appliances, window treatments, floor coverings, air conditioning installation, lighting, security systems and furniture will all be included on this list.
Each item may attract a different rate of depreciation, however, based on the date of acquisition and the average life expectancy of the asset. The surveyor will use benchmarks laid down by the ATO to make a calculation.
Changes to the Law
However, it’s important to take into account recent changes in the law, affecting plant and equipment specifically.
In July 2017, the federal government made changes to their budget in relation to property depreciation. Consequently, there are new rules governing how much depreciation can be claimed for plant and equipment, for acquisitions after May, 2017. Residential investors can only claim depreciation for fixtures that they install themselves post acquisition, so the plant and equipment included with the acquisition is no longer eligible.
Having said that, non-residential properties are exempt from these changes and the law does not affect a brand-new structure. In both of these cases, investors will be able to claim depreciation related to the building and plant and equipment, as before.
Compiling the Depreciation Report
The surveyor will need to access the property in order to list every depreciating asset and gather the necessary information for your depreciation report. This is a painstaking job and they will also gather photographic evidence to support any claim and to be used in the event of an audit. However, once the survey has been completed the information can be used for up to 40 years, or the nominated lifetime of the building. An update will be needed if you carry out any renovations or need to add or replace existing assets.
Don’t underestimate the value of a tax depreciation report.
In some cases, it can make the difference between a successful investment strategy and a loss-making situation instead.
Therefore, you should always engage the services of the professionals. ACP will be delighted to discuss your needs and help you to create your tax depreciation report.