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.
Plant and Equipment (Division 40) accelerated deductions are now available in the following circumstances:-
- Property was first available for lease BEFORE 09 May 2017
- Property is NEW and unused at the start of lease
- Owner operates as a registered COMPANY (but not just as a Trustee of a SMSF)
- Owner operates a BUSINESS of property investment
- All COMMERCIAL property
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:-
Your ACP report will include as standard:-
- 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
- If your property was built after 1987, we guarantee that you will receive not 2X but a minimum of 3X our fee in deductions in the first full year of claim. In fact, we guarantee it or your money back!
- For 2nd hand residential plant and equipment first leased after 9 May 2017 we will provide ‘Deferred Asset’ Schedules to assist your accountant in minimising capital gains tax implications at the point of sale of your property.
We recommend 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).