As the financial year approaches its final quarter, now is an opportune time to review your investment properties.
One effective strategy to enhance your return is through a tax depreciation schedule, a cost-efficient approach for claiming depreciation on property investments.
Let’s decipher the tax benefits across residential and commercial property assets.
Residential Properties
Tax depreciation schedules tailored for residential properties primarily benefit investors. To qualify for these deductions, owners must generate rental income from the property. Claims can be made under Division 43 (capital works) encompassing items such as renovated kitchens or extensions completed by previous owners. This implies that older homes can still benefit from significant deductions from past structural upgrades. However, claims under Division 40 items (Plant and Equipment), such as carpets, blinds, air conditioners are restricted for established or second-hand properties. These items can only be claimed if installed after the settlement date or when the property is converted to an investment property.
Commercial Properties
The eligibility for commercial properties is more expansive. Owners either operating their business from the property or leasing the premises can claim these deductions. A notable feature of commercial property depreciation is the ability to claim fit-out costs, whether incurred by the owner, the tenant, or both through a landlord’s fit-out contribution. Division 43 will be the main contributor of claimable deductions, but unlike residential properties, Division 40 assets can be claimed regardless of the property being resold as second-hand. The list of claimable assets is also substantially larger for commercial properties.
Scrapping
Scrapping plays a vital role in property depreciation. It applies when removed assets and structural elements within a building retain an un-deducted value. At the time of removal, the asset owner can claim the remaining value as an immediate deduction in that financial year. These valuable deductions apply to both removable plant and equipment assets (under Division 40) and the fixed assets or structural capital works elements of a building (under Division 43). The application of scrapping is more common in commercial properties that may regularly undergo fit-out renewals or modifications, adding significant benefits to your deductions. Scrapping is still applicable to residential properties, however, it’s more prevalent in “new” buildings that may undergo some upgrades of plant and equipment that has not yet fully depreciated, such as ovens or air conditioning units.
In conclusion, understanding and utilising these tax benefits can significantly enhance the return on your property investments. It’s important to note that while there are substantial benefits for residential depreciation reports, commercial properties offer additional benefits that can be claimed.
Tax Depreciations Frequently Asked Questions
The Australian Taxation Office (ATO) allows investment property owners to claim deductions on the fair wear and tear on an investment property and its fittings. Tax depreciation is essentially a non-cash deduction. You don’t necessarily have to directly incur the expense to be able to claim tax deductions, you can inherit deductions upon acquisition of the property (different rules apply for residential properties purchased post 9 May 2017). 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.)
Tax Depreciation helps;
- Reduce your taxable income which results in more cash in your pocket
- Increase your cash flow which could enable you to buy your next investment property sooner
- Provide a greater financial return for your investment supporting your financial freedom
Division 43 Capital Works Allowances relate to the building’s structural components, such as bricks, roofing, framing, windows, doors, plaster, and kitchen cabinetry.
Division 40 Plant and Equipment covers items like carpets, blinds, air conditioning units, ceiling fans, and kitchen appliances.
For residential properties, Division 40 deductions are generally only available for new properties, unless the ownership structure is through a company or trust.
If the property was purchased after 9 May 2017 and is held in a personal name, Division 40 deductions cannot be claimed for second-hand assets unless those assets were newly acquired by the current owner.
Anyone who owns an income producing property. Tax depreciation is not available on your home/primary place of residence (PPOR).
Yes, the structure of an investment property has an effective life of 40 years and tax depreciation can be claimed on an investment property that was built post-September 1987. Another tip that could save investors thousands is that their Accountant can help claim tax depreciation retrospectively, amending up to the past two financial year tax returns and making the most of depreciation deductions that may have been lost through not claiming. It is completely legitimate and the ATO actually encourages people to do this.
Yes, and this is where Quantity Surveyors can add serious value with a rental property depreciation schedule. It does not matter if the works were undertaken by a previous owner. When an investment property is purchased, the property investor has also purchased the entitlement to make a depreciation claim on all of the property’s improvements.
Most houses 10+ years old will have had works done. The most typical being:
- Bathroom – commonly worth up to $25,000
- Kitchen – commonly worth up to $30,000
- Floor & Wall Tiles – commonly worth up to $10,000
On a 10-30 year old property there is $65,000 right there which could be detailed in a tax depreciation schedule.
This can add up to $1,625 per year for the next 40 years (2.5% x $65,000), depending on the dates of renovation completion.
If a client is about to renovate an investment property it may be worth recommending a pre-renovation inspection. This inspection allows a Quantity Surveyor to identify what assets or capital works are going to be demolished or thrown out. Value can be assigned to these assets and they can be written off as an immediate tax deduction. A pre-renovation inspection and ‘scrapping report’ can save thousands which can offset the loss made through the renovation period.
Our investment property depreciation schedules start from $600 + GST.
We’ll provide you with one tax depreciation schedule that lasts up to 40 years of claim and the fee is 100% tax-deductible.
We can also undertake a retrospective tax depreciation schedule if you haven’t been claiming deductions so that you don’t miss the tax benefits for your commercial or residential investment properties.
ATO Amendment Period
- Individuals: You can generally amend your tax returns for up to 2 years from the date of assessment.
- Companies, trusts, or complex structures: May have up to 4 years to amend returns.
This means you can backdate your depreciation schedule to the date the property was first used for income-producing purposes, but you can only claim missed deductions for the years still within the amendment window.
To find out how much a depreciation schedule costs for your property, add the details using the link below to receive your obligation-free quote.
If we can assist you in navigating your property decisions, please reach out to our team.