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3 tax time tips for property investors

Bradley Beer
13 June 2017

By Bradley Beer

The thought of the end of the financial year – and all the necessary tasks that come along with it – can be stress inducing for many.

When attempting to include everything in your tax claim, it can be easy for investors to overlook the value of depreciation deductions in their rental properties. However, with the right preparation and professional expertise, these deductions can make a big difference in tax savings.

Depreciation is a tax break for investors who own income-producing properties. The Australian Tax Office (ATO) allows such investors to claim deductions for the wear and tear that occurs to a building’s structure and the assets it contains over time.

With less than a few weeks left until the end of the financial year, here are three tips to help property investors make the most of their depreciation claims.

1. Don’t discount your property’s depreciation potential

When it comes to depreciation deductions, often it isn’t a matter of whether or not the owner is eligible to make a claim for the property. Rather, it’s a matter of how much in deductions can be found based on the investor’s scenario, the type of property they own, it’s settlement date and the date the property commenced construction. Depreciation can be found for the owners of most residential properties.

Depreciation is split into two categories – capital works deductions for the structural features of a property such as the walls, floors and ceilings, and plant and equipment deductions for removable assets such as carpet, hot water systems, blinds and stoves. 

Capital works deductions apply to properties built after September 15, 1987 and can be claimed over forty years, which is the life of a building structure according to the ATO.

When it comes to plant and equipment deductions, it is estimated that around 12% of a typical residential house is made up of these items. The ATO allows investors to claim depreciation deductions for each item based on an individual effective life.

2. Spend to save

In an attempt to minimise costs, many investors may forgo expert depreciation advice and assess their depreciation claims on their own.

The irony often is that the value of deductions found by a Quantity Surveyor can often significantly outweigh the cost of obtaining a professional depreciation schedule.

This is particularly true for those who have recently renovated their investment properties. A depreciation schedule may seem like another cost to add to a long list, however, Quantity Surveyors will be able to estimate scrapping costs for the assets that have been removed and replaced, as well as deductions for the new renovations completed.

For example, if an investor removes carpet during a renovation and if that carpet has remaining years of effective life according to the ATO’s rulings, investors can claim an immediate write-off for the asset’s un-deducted value.

Quantity Surveyors are recognised by the ATO as having the skills necessary to estimate construction cost for depreciation purposes. They will inspect your property and detail available deductions in a tax depreciation schedule that can be provided to your accountant when assessing your claim. Even the cost of the schedule itself will attract a 100% deduction. Those who order their schedule prior to June 30 can claim the fee in the same financial year, while those who wait until the new financial year will be able to claim the fee back in the following tax return. 

3. Be aware of proposed changes to depreciation rules

In the recent Federal Budget, Treasurer Scott Morrison announced proposed legislation changes to plant and equipment deductions. Investors could previously claim these deductions for existing assets in a property they purchased. Under the new rules, which are yet to be legislated by Parliament, new owners of second-hand properties will only be able to claim deductions for plant and equipment assets they spend money on themselves, or for which they directly incur the expense. 

The proposed rules will apply to property investors who exchanged contracts for properties purchased after 7:30pm on May 9.

The good news is that properties purchased before this date will be grandfathered and this means depreciation deductions can continue to be claimed as per normal. Investors will also still be able to claim qualifying capital works deductions.

Some investors may be unsure of how these rules will affect them. Professional depreciation advice is as important as ever in understanding what deductions are applicable and in line with the current rules. By engaging with a professional Quantity Surveyor, investors can ensure their deductions are correct and maximised and avoid some of the risks associated should the ATO conduct an audit of their claims. They will also be able to improve their cash return and as a result, have more dollars in their pocket.

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