Understanding how you can benefit from tax depreciation is as simple as owning a car.
If you bought a new car, you would understand that every year it depreciates in value. The same principle applies to property. If a property is being used for investment purposes, the ATO allows the investor to claim the decline in value of the building by way of a tax deduction.
The amount that can be claimed depends on the age and value of the building but varies between 2.5% and 4% of the capital works value of the building each year. An investor can claim these tax benefits through a tax depreciation schedule report prepared by a quantity surveyor. Thisshould generally be done when the investor buys the property.
A quantity surveyor, also known as a construction economist or cost manager, is one of a team of professional advisors to the construction industry. As an advisor, they estimate and monitor construction costs, from the feasibility stage of the project through to completion of the construction period. After construction they prepare tax depreciation schedules for property tax depreciation purposes. The quantity surveyor produces a tax depreciation schedule for a client,which is a physical snapshot of the property.
What’s in the depreciation report
The depreciation report itemises the following:
- Age of the property
- Material it is built from
- Internal fittings such as carpets, window treatments, appliances and so on
An estimated value is placed against these various items, and they are depreciated based on their age and value.
The investor gives this report to their accountant who uses it to work out the tax benefits they can obtain each year. You only need to do one depreciation report for a property,and it can be updated each year by the accountant, for example if the investor installed a new kitchen.
The cost of a depreciation report is around $600,and this is tax deductible (as prepared by DEPPRO).
The financial benefits of such a depreciation report can be large; for new properties especially, it could be up to $10,000 each year. As a rule of thumb, tax depreciation benefits can be equivalent to around 60% of the annual rental income of an investment property.
Most properties,regardless of their age,can offer investors substantial tax benefits when such a schedule is produced. That is why it is important to obtain a tax depreciation schedule as soon as possible after the settlement date of your purchase, because if you undertake renovations the schedule will ensure you can claim all the tax benefitsrelated tophysical improvements made
to the building.
Getting a tax depreciation report is particularly important if you’re buying properties for renovation purposes.
Are you missing out on tax benefits?
Many investors still do not understand that they can qualify for significant tax benefits when undertaking renovation of their investment properties.
Common refurbishments include renovations to kitchens and bathrooms, which can account for around 60% of the budget, with the remaining 40% being spent on lounge, family room and bedrooms,include floor coverings and repainting.
Many investors throw out items without understanding that they may claim tax benefits on these materials at 100% of their written-down value in theyear of disposal.
A typical amount spent on a home renovation ranges from $20,000 to $50,000 for a basic refurbishment, and the investor can qualify for plant and capital works allowancesas a tax deduction as well as forthe residual write-off of the disposed item.
However, to qualify for these tax benefits, the investors have to undertake a depreciation report for the property as near to the date of purchase as possible.
If you don’t obtain a tax depreciation report,then you cannot claim these substantial tax benefits as the ATO requires such a report to ensure the investor is making legitimate claims.
To protect your interests and ensure that you select a company that is fully compliant with ATO rulings, members of the public should choose a company that is a member of the Australian Institute of Quantity Surveyors (AIQS).
AIQS is the professional standards body for quantity surveyors throughout Australia and enjoys a close working relationship with the ATO.
Unfortunately, there are many businesses in the industry that do not have the qualifications and experience to ensure property investors receive quality information. Property investors should be wary of companies that are not members of AIQS and that employ sales staff who tout catchphrases and have a dubious approach to providing advice in relation to tax depreciation entitlements.
In many cases these companies probably do not complete the depreciation schedules themselves but outsource the work to others who do not even see the properties and simply apply a one-size-fits-all approach to preparing their reports.
Information provided by Paul Bennion, managing director of DEPPRO, which is an Associate Member of AIQS and uses systems that are fully compliant with ATO rulings.