INVESTMENT PROPERTY TAX DEPRECIATION FAQ’S
Are you maximising the tax deductions available through your investment property?
With 30 June fast approaching, it comes that time of year again where we are all starting to tidy up our tax affairs and of course hoping to reduce our tax payable or even increase our tax refund! If you own an investment property, tax depreciation will most likely be your largest tax deduction – if done correctly.
There are many misconceptions about tax depreciation so let’s run through some frequently asked questions as they most likely will relate to you coming up to tax time.
What is tax depreciation?
The Australian Taxation Office (ATO) allows investment property Owners to claim a tax deduction on the fair wear and tear on an investment property and its fittings. Tax depreciation is essentially a non-cash tax deduction. You don’t necessarily have to directly incur the expense to be able to claim the deduction, you can inherit deductions upon acquisition of the property (different rules apply for residential properties purchased post 9 May 2017, and also if recent federal budget announcement measures are passed).
Tax depreciation is split into two categories; Division 43 Capital Works Allowances (the building itself) and Division 40 Plant and Equipment (eg. carpets, blinds, A/C, ceiling fans etc.)
Is my property too old to depreciate?
Depreciation tax deductions are available to residential property Investors whose investment property was built after 15 September 1987, commercial properties when built after 20 July 1982 and any refurbishments/renovations/improvements from 27 February 1992. You do not have to necessarily know when these works were done if done prior to your ownership – leave this up to your tax depreciation provider.
Depreciation on plant and equipment is also available on all new buildings. In summary, 98% of investment properties will be entitled to some form of depreciation deduction.
I have held my property for years, so there’s no point claiming depreciation now?
If you are thinking this please remember that the structure of your investment property has an effective life of 40 years! If you have owned your investment property which was built post September 1987 then it is very likely you are missing out on thousands of dollars’ worth of possible tax deductions. Another tip which could save you thousands is that your Accountant can help you claim tax depreciation retrospectively, amending up to the past two financial year tax returns without special consideration from the ATO, making the most of your depreciation deductions which you may have lost through not claiming completely legitimate, and the ATO actually encourage you to do this.
But won’t my accountant look after my tax depreciation?
Quantity Surveyors like us are recognised by the Australian Taxation Office (ATO) as the most suitably qualified profession to estimate the depreciable expenditure spent on the property prior to your purchase, as well as the value of the fittings and equipment within the property. In accordance with ATO Tax Ruling 97/25, if your residential investment property, for example, was constructed after September 1987 and/or construction costs are unknown, you must engage a registered and qualified Quantity Surveyor to produce a depreciation schedule. Unfortunately, your Accountant can’t do this for you. If you are audited, you will have to substantiate your depreciation claim, a QS report is what you require to substantiate this claim with ease.
At the very least it is worth contacting your tax depreciation specialists to have a no obligation discussion regarding your investment property scenario.
Article Contributed by Kara Neale, Compliance Co-Ordinator at Strata Compliance Solutions.
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Yes but won’t depreciating your assets only mean you will pay extra capital gains when you sell?
If this is correct, then I feel to create a balanced opinion you need to give examples of outcomes with and without depreciation.
Good morning, Jeff,
Thanks for your question!
For the capital works (building) deductions under Division 43, the amount you claim does reduce the property’s cost base, so it increases the capital gain when the property is sold.
That doesn’t make depreciation a wash though, for two reasons. Firstly, you’re claiming the deduction now against income taxed at your full marginal rate, and only paying some of that back on sale, often years down the track, so there’s a clear timing and cash flow benefit.
Secondly, if the property is held for more than 12 months the 50% CGT discount applies, therefore you deduct at 100% now and only pay back roughly 50% later.
Plant and equipment (Division 40) items are handled separately through a balancing adjustment rather than the CGT cost base, so they don’t carry the same clawback. An added benefit of depreciation when Division 40 is applicable.
We don’t quote on or complete a Tax Depreciation Schedule unless it’s worthwhile for the client, However, there are things Owners can do to ensure maximum benefit. The most obvious being making sure they hold to get the CGT discount.
Even with the budget announcement recently, if these changes come into effect as there is still a discount in play the benefit of depreciation remains.
I hope this answers your question, don’t hesitate to get in touch if there is any further assistance we may be able to provide.