Ten depreciation tips

Property depreciation is the key to increasing cash-flow from a residential investment property.  Here are ten depreciation tips to assist investment property owners.

No property is too old

An investment property does not have to be new. Both new and old properties will attract some depreciation deductions. One common myth is older properties will attract no claim. It is worth making an enquiry about any property.

Previous tax returns can be adjusted when a property owner has not been claiming depreciation or maximising tax depreciation deductions. The previous two financial year tax returns can generally be adjusted and amended.

Deductions are available for forty years

From the date construction was completed the Australian Taxation Office (ATO) has determined that any building eligible to claim the building write-off allowance has a maximum effective life of forty years. Therefore, investors can generally claim up to forty years depreciation on a brand new building, whereas the balance of the forty year period from the construction completion date is claimable on an older property.

Claim renovations completed by the previous owner

Anything in the property that occurred in a previous renovation will be estimated by our Quantity Surveyors and deductions calculated accordingly. This includes items that are not obvious, for example new plumbing, water proofing, electrical wiring or a pergola, etc. For capital improvements to be eligible for capital works deductions, construction must have commenced within the qualifying dates, which are after the 15th of September 1987 for residential properties and after the 20th of July 1982 for commercial buildings.

There are two main areas to a property depreciation schedule, plant and equipment and the capital works allowance

Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant and equipment items include but are not limited to:

Hot water systems

Carpets

Blinds

Ovens

Cook tops

Rangehoods

Garage door motors

Door closers

Freestanding furniture

Air-conditioning systems

The capital works deductions (also known as division 43 or building write-off) is a deduction for the structural element of a building including items that are fixed to the structure. It is based on the historical construction costs of the building and includes material such as bricks, mortar, plaster walls, flooring, wiring and items such as doors, tiles, windows, toilets and guttering.

Prime cost and diminishing value methods

Two methods used when depreciating assets are diminishing value and prime cost methods. The intentions of the property investor will determine which depreciation method will be most suitable for them.

Under the diminishing value method the deduction is calculated as a percentage of the balance you have left to deduct. Under the prime cost method the deduction for each year is calculated as a percentage of the cost.

The method chosen depends on the long and short term strategy of the property investor. If you claim using the diminishing value method, you are claiming a greater proportion of the assets cost in the earlier years, increasing deductions earlier. Using the prime cost method spreads deductions out over time. 

Use a qualified professional

Quantity Surveyors are qualified under the tax legislation TR97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation schedules. They are affiliated with industry regulating bodies and gain access to the latest information and resources through their accreditations. BMT Tax Depreciation is accredited with the Australian Institute of Quantity Surveyors (AIQS), The Royal Institute of Chartered Surveyors (RICS) and The Auctioneers & Valuers Association of Australia (AVAA).

What is pooling?

Low-value pooling is essentially a legislated method of depreciating plant items within an income property at a higher rate to maximise depreciation deductions. The following categories of depreciating assets can be allocated into a low-value pool and are claimed at a higher tax rate to maximise deductions:

Low-cost pool: A low-cost asset is a depreciable asset that has a cost of less than $1,000 in the year of acquisition.

Low-value pool: A low-value asset is a depreciable asset that has an un-deducted value of less than $1,000. That is, the cost of an asset is greater that $1,000 in the year of acquisition but the value remaining after depreciating over time (opening value less deductions in year 1 less deductions in year 2 etc) is less than $1,000. Assets meeting both these classifications can be placed in a pool and depreciation at an accelerated rate.

Plant and equipment must be itemised

The ATO specifies an individual effective life for each plant and equipment item. Subsequently, the BMT Tax Depreciation schedule shows the estimated cost for each item and its contribution to the depreciation total per financial year. On the other hand the original building structure and capital improvements, or the division 43 component, are written off at the same rate (unless building works have been completed over different legislation periods).

What information does the property owner need to provide?

Information required to produce a tax depreciation schedule includes the following:

Date of settlement

Purchase price

Access details for inspection (e.g. Property Manager or tenant details)

Any information pertaining to improvements or additions made to the property including dates and actual costs (where available)

The date the property became available for income producing purposes

What you should receive in a property depreciation schedule

A method statement

A schedule of the diminishing value method of depreciation

A schedule of the prime cost method of depreciation

A schedule of pooled items for the property

The division 43 allowances available for the property

A detailed forty year forecast table illustrating all depreciable items together with building write-off for both prime cost and diminishing value methods

A comparative table of the two methods of depreciation

Common property items with strata or community title complexes such as lifts and swimming pools are included in the depreciation schedule in most states for a unit in a multi-unit development

The schedule should be structured to facilitate the client to be able to amend previous year’s tax returns to re-coup unclaimed or missed depreciation benefits

The schedule is pro-rata calculated for the first year of ownership based on the settlement date so that the Accountant has the exact depreciation deductions for each year

The schedule is valid for the life of the property until capital improvements are undertaken or ownership is changed

When there are multiple owners, a schedule should be prepared for each owner

Article provided by BMT Tax Depreciation.

Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Chief Executive Officer of BMT Tax Depreciation.  

Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.