Understanding Your Tax Depreciation Reports
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. Claim allowances on investment properties to reduce taxable income, improve cash flow, and use as a negative gearing factor. Understand tax law changes and obtain a tax depreciation report for best results.
Understanding Tax Depreciation Reports
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 tax 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
Your tax depreciation schedule can be broken down into two separate areas.
Capital
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 tax depreciation report. Rate calculations will depend on the date of construction and the type of building as well.
Plant and Equipment Depreciation
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 tax depreciation report. 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 assets 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 tax 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.
Careful Calculation
A tax depreciation report is crucial for any property investment strategy. It can make the difference between success and failure. Don’t underestimate the value of a tax depreciation report in maximising tax savings, complying with tax laws, making informed asset management decisions, and providing reliable financial reporting.
Engage the services of professionals like ACP for creating a reliable tax depreciation report. ACP is experienced in providing tax depreciation services and is delighted to discuss your needs.