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.
