Professionally prepared depreciation schedules are one of the keys to getting the best from your investment property tax benefits.
Many clients initially baulk when we suggest they spend the money to get a depreciation report prepared – but in most cases they pay for themselves many times over during the life of your investment property, because of the extra deductions they allow.
And importantly, they are deductions that do not require any extra cashflow once the report is prepared.
The following are some of the most frequently asked depreciation questions – answered by the experts at BMT Tax Depreciation.
What is depreciation?
As a building gets older and items within it wear out, they lose value. The Australian Taxation Office (ATO) allows property investors to claim a deduction relating to the building and fixtures it contains. Depreciation can be claimed by any owner of an income producing property. This deduction essentially reduces the investment property owner’s taxable income.
What is a depreciation schedule?
A depreciation schedule is a comprehensive report that outlines the depreciation deductions claimable by investment property owners on the property’s building structure and its fixtures and fittings within it.
A depreciation schedule, prepared by a specialist Quantity Surveying firm, is one of the best ways that you can maximise the cash return from your investment property each financial year.
If a residential property was built before 1987 is it too old?
No, investment properties do 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. Previous year’s tax returns also can be adjusted. If a property owner has not maximised their depreciation deductions, the ATO allows investors to adjust the previous two financial years tax returns.
How is a building’s age calculated?
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.
A quantity surveyor will conduct the relevant searches to accurately determine the age of a building. This includes historical council searches regarding lodged development applications, as well as occupancy certificates and certified final inspections.
What is the difference between plant and equipment and capital works?
Plant and equipment (division 40) assets 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 and equipment assets also include electronically or mechanically operated items, even though they may be fixed to the structure of the building.
Plant and equipment assets include, but are not limited to:
Hot water systems
Garage door motors
Air conditioning systems
Capital works (division 43) is based on the historical construction costs of the building and includes such items as bricks, mortar, walls, flooring and wiring.
Why does the depreciation schedule last 40 years?
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 construction was completed. The owner can generally claim up to forty years depreciation on a brand new building, whereas the balance of the 40 year period is claimable on an older property.
Can the building owner claim renovations that were completed by a previous owner?
Yes. Anything in the property that is part of a previous renovation will be estimated by Quantity Surveyors and deductions calculated accordingly. This includes items which may not be so obvious, for example, new plumbing, waterproofing and electrical wiring. For capital works improvements to qualify for the division 43 building write-off, they must have commenced construction within the qualifying dates.
How long will it take to get my schedule?
Once a professional Quantity Surveying Firm, such as BMT, have collected all of the details needed, it usually takes between five – seven days for our team to prepare a schedule.
Is your property inspected?
A professional quantity surveyor should inspect all properties that a tax depreciation schedule is to be completed on. This ensures that all assets are identified and depreciation deductions maximised. This also ensures schedules are fully compliant with the guidelines set out by the Australian Institute of Quantity Surveyors (AIQS), the Royal Institute of Chartered Surveyors (RICS) and, importantly, are ATO compliant.
Doesn’t my accountant take care of this?
Professional Quantity Surveyors will work with your accountant to ensure that your depreciation claim is maximised each financial year for your investment property. The ATO has stated that Quantity Surveyors are one of the only recognised professions with the appropriate construction costing skills to estimate construction costs for depreciation purposes. Quantity Surveyors are qualified under the tax ruling TR97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation schedules.
What happens when renovations are undertaken after the report is finished?
If you make additions to the property after you receive your depreciation schedule, your depreciation schedule can be updated – either free or usually at a discounted price for any changes.
Source: Beer, Bradley (B Con Mgt, AAIQS, MRICS, AVAA), CEO BMT Tax Depreciation.
BMT Contact details: 1300 728 726 or website www.bmtqs.com.au