The Key to Maximising Your Investment Property Returns

When you purchase an investment property, you’re not just acquiring real estate; you’re also embarking on a journey that intertwines with the complexities of tax benefits, particularly through property tax depreciation. Much like a car, which depreciates in value over time, an investment property also experiences a decline in value.

The Australian Taxation Office (ATO) offers property owners the ability to recoup some of the value lost due to depreciation, by claiming it as a tax deduction. This is particularly applicable if the property in question generates investment income. It’s a process that acknowledges the inevitable wear and tear that both residential and commercial buildings and their components undergo over time.

Capital Works Deductions: The Basics

One of the key elements of property tax depreciation is related to the building’s structure itself—referred to as the Capital Works component. Depending on when the original construction of the building took place, property owners can claim a deduction of either 2.5% or 4% of this cost. This percentage reflects a fixed annual rate, designed to compensate for the depreciating value of the property’s physical structure over time.


Accelerated Depreciation for Plant & Equipment

Beyond the bricks and mortar, the ATO recognises that certain elements within the building have a faster rate of depreciation. This includes a variety of items classified under ‘plant and equipment’ such as appliances, carpets, air conditioning units, blinds, and smoke detectors in residential buildings and items such as desks, flooring and shelves in commercial buildings. These items, due to their nature and utility, tend to wear out more quickly than the building’s structural components.

The beauty of this system lies in the accelerated depreciation rates applied to these plant and equipment items. Unlike the steady depreciation of the building’s structure, these items can be depreciated at a faster rate, reflecting their shorter effective life span. This provides an additional layer of tax deduction benefits, enabling property owners to claim a higher depreciation expense in the earlier years of ownership.

Increase the cash return on your investment property

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Maximising Your Tax Benefits

For property investors, understanding and leveraging property tax depreciation is crucial. It not only enhances the investment’s return by reducing taxable income but also provides a more accurate reflection of the property’s value over time. Engaging with a qualified quantity surveyor or tax professional can help in accurately assessing and claiming these depreciation deductions, ensuring that investors maximise their tax benefits.

Property tax depreciation is a vital consideration for anyone involved in property investment in Australia. It offers a silver lining to the cloud of depreciation, turning a natural decline in building value into an opportunity for tax savings. By fully embracing this aspect of property ownership, investors can significantly improve the financial performance of their investment, making it a key strategy in any successful property investment portfolio.

Studies And Planning Your Budget

Division 43: Capital Works Deductions

Division 43 relates to the deductions that can be claimed on the capital works of a property. This encompasses the building’s structure and any permanent fixtures and improvements. Essentially, it covers the construction costs of the building itself, including extensions, renovations, or improvements made to the property.

Under Division 43 of the Income Tax Assessment Act 1997, property owners can claim deductions based on the historical construction costs of the property. The deduction rate is set at either 2.5% or 4% per annum, depending on the construction commencement date, and can be claimed for up to 40 years from the date the construction was completed.

This long-term benefit underscores the importance of capital works deductions in the overall strategy of property investment, ensuring owners can gradually recoup a portion of their investment over the building’s effective life.

Property Depreciation Needs

Division 40: Depreciating Assets

While Division 43 focuses on the building structure, Division 40 zeroes in on the depreciating assets, or plant and equipment, within the property. These assets include non-fixed items within the building, such as appliances, blinds, carpets, and air-conditioning systems—items that have a shorter effective life compared to the building structure.

Division 40 allows for these assets to be depreciated at an accelerated rate, recognising that their value diminishes much more quickly due to wear and tear or technological obsolescence. The rates and methods of depreciation under Division 40 vary, depending on the asset’s effective life as determined by the ATO.

This provision enables property owners to claim significant deductions in the early years of their investment, reflecting the rapid decline in the value of these assets.

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Strategic Implications for Property Investors

Understanding and applying the principles of Divisions 40 and 43 can significantly enhance the tax efficiency of property investments. By maximising depreciation deductions, investors can reduce their taxable income, thereby improving cash flow and the overall return on investment. However, navigating these tax provisions requires a detailed understanding of the law, as well as a comprehensive inventory of the property’s depreciable assets.

To ensure compliance and optimisation of tax benefits, property owners often engage tax professionals or quantity surveyors. These experts can prepare a depreciation schedule and a detailed report that outlines all deductible amounts over the asset’s and property’s lifetime. Such a schedule not only simplifies the process of claiming deductions annually but also ensures that property owners are fully leveraging the tax advantages available to them under Australian law.

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The Strategic Advantage of Common Property

The Australian Taxation Office (ATO) allows property owners to include a proportionate share of this common property in their depreciation claims. This means that elements such as the building’s lobby, external facades, gardens, swimming pools, and even gym equipment, which contribute to the attractiveness and utility of the property, can be depreciated over time. This depreciation is calculated based on the owner’s share of the total property and represents a significant opportunity to enhance tax deductions.

By incorporating common property into tax depreciation reports, investors can unlock additional deductions that may not have been initially apparent. This strategic approach to depreciation not only maximises the tax benefits but also has a profound impact on the property’s cash flow. Depreciation claims on both the individual unit and the shared common property can transform the financial dynamics of the investment.


Maximising Your Claim Window: Individual Taxpayers

For individual taxpayers who may not have previously navigated the intricacies of depreciation claims, there exists a generous provision to amend their tax returns. Specifically, individuals are entitled to retrospectively amend their previous lodgements for up to two years from the date of any previous lodgement in addition to the current year of claim. This brings the total to an impactful three-year window for claiming depreciation and capital works deductions that may otherwise have been missed.

This opportunity is not just a mere administrative detail; it represents a strategic advantage. For those who have overlooked or been unaware of their eligibility for depreciation claims, this window allows for the correction of past oversights, potentially unlocking a significant boost to your tax returns.


Expanding Opportunities for Companies & Registered Entities

Companies and registered entities find themselves in an even more advantageous position. These entities are entitled to amend their previous years of lodgement for up to four prior years, plus the current year of claim, totaling a five-year opportunity for depreciation claims.

This extended period acknowledges the complexities and varying scales of property investments undertaken by such entities, offering a broader scope to optimise tax outcomes.

Maximise Your Property Investment Returns with ACP Reports

Your Asset Capitalisation Plan (ACP) report is a pivotal tool for enhancing the financial performance of your property investment over its entire lifespan. This report includes a detailed 40-year depreciation schedule, showcasing both Prime Cost and Diminishing Value Methods of Calculation.  It also features a graph to help you identify the most advantageous depreciation method, incorporates Low-Value Pooling benefits, and allows for a 100% first-year claim on items under $300, complete with a tax-deductible invoice.

We stand behind the value of our services with a unique guarantee for properties built after 1987: receive at least three times our fee in deductions in the first full year of your claim or get your money back.  Additionally, for second-hand residential plant and equipment first leased post-9 May 2017, we provide ‘Deferred Asset’ Schedules. These schedules are specifically designed to aid in reducing capital gains tax implications upon selling your property, ensuring a holistic approach to optimising your investment’s profitability and tax efficiency.

Why Choose ACP

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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).