Our experts explain how to make your property a weapon of tax deduction and save you 30% in next year’s tax bills.
Anyone who has experienced a few fairy tales as a youngster would recognise “Raise taxes!” as the catchcry of an evil king, bent on funding a few more royal banquets
on the near-broken backs of his poor subjects. Sometimes, it seems we suffer a similar sentiment from our elected leaders here in Australia; whenever there is money to be earned somewhere, along comes another tax, creeping slowly into the picture and stunting your financial growth.
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One important difference between a mythical kingdom and our democratic society, however, is our access to tax returns and the many deductions that can be found if you look hard enough. Sure, they may not all be advertised in bold on the home page of the ATO website, but asking someone with professional know-how can reduce your tax bill by a significant amount. If you pay attention to some of the following tips, the taxman might have to use his own money to fund his end-of-financial year party.
David Shaw, director, WSC Group
WSC Group director David Shaw believes the following to be the main areas where people fall short on claiming correct deductions. By following these tips, he says you will be able to get additional tax benefits of somewhere between 25 and 65%.
1. Always claim for depreciation – even on older properties
People can still get a quantity survey for depreciation purposes and can claim depreciation on older properties. Even if they were built before July 1985 and building depreciation doesn’t apply, they’ll still get fittings depreciation.
Otherwise, they could miss out on between $2,000 and $10,000 per year on an average residential property, which is worth between $400,000 and $500,000.
2. Claim interest and holding costs during construction period
People who construct their investment properties can claim the interest and the holding costs during the construction period, according to the tax ruling 2004-4. Many investors miss out on that claim in the first year of construction, which can cost them between $10,000 and $20,000 in deductions.
3. Claim all charges to your property
There are a number of property groups out there that charge you a fee, but pay rental protection insurance to you if your property doesn’t rent. You shouldn’t assume that the fees charged are not deductible, especially in relation to rental protection insurance, which could be paid up to 12 months in advance.
4. Amend your tax return if you missed a claim
If you realise you have missed out on deductions after your tax return has been submitted, you can contact a professional, who will prepare an amended return and lodge it with the tax office. Returns of up to two years old can be amended, but the tax office will consider beyond two years if you lodge an objection.
Tyron Hyde, director, Washington Brown
1. Maximise the cost of construction
When depreciating an investment property, the original construction cost must be used. Many of our clients are now buying properties at dramatically reduced prices –
nearer to the original building cost.
The tip is to make the most of the current market conditions and search for properties where the actual construction cost is close to the current purchase price.
For example, we had a client that bought a property in Sydney’s western suburbs for $250,000 last week. It was a two-year-old, twobedroom unit. We were the quantity surveyors on the project and I know the original construction cost for that unit was $175,000, but its purchase price, brand new, was $335,000.
We still use original construction cost as the basis for the incoming property investor, so not only has the new purchaser paid less stamp duty and increased their chance of a capital gain, but their depreciation deduction relative to the purchase price has also increased.
So, this property would be cash flow neutral at worst and cash flow positive at best.
2. Get a depreciation schedule
Even properties built before 1985 (when the building allowance kicked in) are worth depreciating. The purchase price of your property includes the land, building and
plant and equipment. As a quantity surveyor we help you apportion or break down those categories.
3. Maximise depreciation claim
Taller buildings attract higher plant and equipment allowances and the higher the plant and equipment, the higher the depreciation. Plant and equipment refers to necessary services within the building, as well as items within the property itself.
Some of the services required as buildings increase in height are obvious, such
as a lift (transport service). Others are less obvious, with fire hose reels and intercoms all being depreciable under this category. The other reason tall buildings have a higher ratio of plant and equipment has to do with the amenities the developer provides.
For instance, some high-rise buildings have swimming pools, gyms and even mini cinemas.
Here’s a rough ratio of plant and equipment relative to construction cost.
Now take a look at how this translates into deductions (see Table 2). These allowances all relate to a $400,000 property in a capital city – and are very approximate to allow for illustrative purposes only.
As you can see, the taller the building, the more you can depreciate. But keep in mind that a tall building doesn’t necessarily make a better investment.
It often means there’ll be higher levies and additional expenses, and you own less land as well. But at the end of the day, it’s up to you to weigh up the pros and cons… and make that final decision.
4. Deduct items as quickly as possible
Individual items under $300 can be written off immediately. An important thing to remember here is that provided your portion is under $300 you can still write it off.
For instance, say an electric motor to the garage door cost an apartment block $2,000. If there are 50 units in the block, your portion is $40. You can claim that $40 outright because your portion is under $300.
You can also try to buy items that depreciate faster. Items between $300 and $1,000 fall into the low pool category and attract a higher depreciation rate. So for instance, a $1,200 television attracts a 20% deduction while a $950 television deducts at 37.5% per annum.
5. Avoid DIY depreciation
There is a chance that you will miss out on deductions by doing it yourself. The DIY options in the marketplace give you a tick sheet and ask you to take your own measurements.
Now let’s say you measure from one bedroom wall to the other. If you do that all around the house you could reduce the property’s size by 10% in gross area. At approximately $1,500 a square metre to build, you would have missed out on something like $15,000 worth of tax deductions.
Not only that, you could also possibly attract an ATO audit.
6. Claim the residual value write off
The changes in the definition of plant and equipment are quite confusing and this often leads to missed tax claims. You can claim residual value write off if the item was absolutely necessary in order to make the property available to be rented out.
For instance a kitchen is an absolute necessity – but a microwave isn’t. Therefore, if you are renovating a kitchen or bathroom on a property built after 1985, get a quantity
surveyor in before you demolish so they can assess what the residual value of these items are.
That value can still be claimed as an outright deduction and can generate huge savings in the first year. For instance, rental property with a 20-year-old $10,000 kitchen attracts an immediate deduction of around $5,000.
7. Furnish your property
Furnishing your property is another way to increase your depreciation deductions as it attracts higher depreciation rates. For example, we have calculated that a $20,000 furniture package supplied by a developer can result in an additional $10,000 deduction in the first year alone.
Furnishing is better suited to smaller one- or two-bedroom apartments in transient areas that attract short-term tenants and holiday rentals.
8. Avoid properties with a 4% building allowance
Residential property built between 18 July 1985 and 15 September 1987 attracts a 4% building depreciation rate. Everything built since then attracts a 2.5% rate.
So, if you do buy a property built in 1986, that means 23 of its useful 25 years have been eaten away (from 2009 to 1986). You will only be able to depreciate the residual for the next two years at 4%.
However, if you buy a property where construction commenced in 1989, you still have 20 years to depreciate the property, at 2.5%. That’s 50% of the original construction cost left for you, as opposed to only 8%.
9. Use an experienced quantity surveyor
The laws have changed frequently over the years and each building is unique, so it pays to get expert advice. Engage a firm that has been well-established as they will have the necessary experience to analyse your property correctly. The Australian Taxation Office has identified quantity surveyors as appropriately qualified to estimate the original construction costs in cases where that figure is unknown.
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