Property investors have access to a wealth of potential tax credits, yet often fail to take full advantage of their property’s tax depreciation potential.We offer the following tips for discovering the value of your property’s depreciation deductions:
1. Does it matter if I didn’t claim last year?
You can adjust previous year’s tax returns; when a property owner has not been claiming or maximising tax depreciation deductions, the previous two financial year’s tax returns can generally be adjusted and amended.
2. If my property was built before 1985, is it too old?
No. Your investment property does not have to be new; both new and old properties will attract some depreciation deductions. It is a common myth that older properties will attract no claim.
3. Why is plant and equipment itemised?
The ATO specifies an individual effective life for each plant and equipment item, so you need to know the estimated cost for each item and its contribution to the depreciation total per financial year. The original building structure and capital improvements, or Division 43, are all written off at the same rate (unless building works have been completed over different legislation periods).
Therefore, individual costs for these items aren’t expressed in the report. If required by the ATO, the estimates for Division 43 can be justified.
4. How long does the depreciation and capital allowance schedule last?
The ATO has determined that any building eligible to claim the building write-off allowance has a maximum effective life of 40 years from the date of construction completion. Therefore, investors can generally claim up to 40 years’ depreciation on a brand new building, whereas the balance of the 40-year period from construction completion is claimable on an older property.
5. Can I claim renovations completed by the previous owner?
Yes. Anything in the property that is part of a previous renovation will be estimated by the assessing quantity surveyors and deductions calculated accordingly. This includes items that are not obvious e.g. new plumbing, water-proofing, electrical wiring etc. For capital improvements to qualify for the Division 43 building write-off allowance, they must have commenced construction within the appropriate Division 43 time periods.
6. What information do I need to provide?
Information required to produce a Tax Depreciation and Capital Allowance report includes the following:
a. Date of settlement
b. Purchase price
c. Access details for inspection (e.g. property manager or tenant details)
d. Any information pertaining to improvements or additions made to the property including dates and actual costs (where available)
e. The date the property became available for income producing purposes.
7. What is the difference between plant and equipment and the building write-off allowance?
Plant and equipment items are items that can be `easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items also include items that are mechanically or electronically operated, even though they can be fixed to the structure of the building. Plant and equipment items include (but are not limited to):
a. Hot Water Systems
g. Garage Door Motors
h. Door Closers
i. Freestanding Furniture
j. Air Conditioning Systems
The building write-off allowance (otherwise known as Division 43) is based on historical building costs and includes things such as the bricks, mortar, walls, flooring and wiring.
8. How do you work out how old the building is?
The age of the building can be determined by obtaining council documents with dates pertaining to the original application approval date or the Occupancy Certificate date and final inspection date. Similar methods are used Australia wide, however some properties are privately certified.
9. What is pooling?
A low value pool exists providing investors the benefit of pooling items that meet either of the following classifications:
Low Cost Pool – A low cost asset is a depreciable asset that has a cost of less than $1000 in the year of acquisition.
Low Value Pool – A low value asset is a depreciable asset that has an undeducted value of less than $1000. That is, the cost of an asset is greater than $1000 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 now less than $1000. Assets meeting both these classifications can be placed in an itemised pool.