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Q: I own a three-bedroom townhouse that I bought three years ago for $434,000.
I never bothered getting a depreciation schedule as the place was 17 years old, and I was always under the impression that depreciation was only for new homes. However, I recently read in this magazine that older homes can attract good depreciation benefi ts as well.
What kind of depreciation schedule would I be able to get on this type of property, and can I go back and make claims on my previous tax returns? It’s a two-storey townhouse, with three bedrooms, and there is airconditioning in the main areas and living room, with a pool in the complex.
A: Property tax depreciation allowances or ‘capital allowances’ are calculated based upon two different sections of income tax legislation and consider two different aspects of your asset. The two main areas to property tax deductions are: Plant & Equipment; and the Capital Works deductions.
Plant & Equipment (also known as Division 40) are items that are usually fixtures and fi ttings, 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, cooktops, range hoods, freestanding furniture, air-conditioning systems, BBQs, heaters and flooring (floating floor boards).
“If you have not claimed depreciation on your property in the past, it is possible to amend previous tax returns – to a point”
Values ascribed to the Division 40 items relate to the purchase price of the property and commence depreciating from date of settlement or when you acquire the particular item. Our tax calculator on our website, will give you an estimate of what your yearly deductions may be.
For a townhouse purchased for approximately $434,000, as a guide, our calculator shows an estimate of $5,800 in year one, $5,500 in year two and $4,700 in year three.
Capital Works Allowances are a deduction for the structural elements of a building. These deductions are based on the historical construction costs of the building and include materials such as, but not limited to: bricks, mortar, plaster walls, flooring (fixed timber flooring), wiring, doors, tiles, windows, toilets, basins, shower hobs, guttering, roofi ng, concrete slabs, footpaths and driveways.
From the date that construction was completed, the Australian Taxation Office (ATO) has determined that any building eligible to claim capital works deductions has a maximum effective life of 40 years.
Therefore, investors can generally claim up to 40 years of deductions on a brand new building, whereas only the remaining balance of the 40-year period from the construction completion date is claimable on an older property. For example: if you purchase a building that was built 10 years ago, you effectively
can claim an annual deduction for the next 30 years based on the construction costs 10 years ago at 2.5% per annum.
You mention that your townhouse is 17 years old, therefore, generally you should be able to make a claim for the depreciation costs for the next 23 years. Capital Allowances are primarily based on the structure of your asset.
Claims for these are dependent on the original construction cost and when the building was built. Additionally, any renovations, extensions and renewals can also be claimed, and again costs as a base for these deductions have to be calculated as at the time that the work was completed.
Generally, non-residential properties built after July 1982 and residential properties built after July 1985 are eligible for Division 43 deductions. If you have not claimed depreciation on your property in the past, it is possible to amend previous tax returns – to a point. We recommend you seek advice with your accountant to determine how far and to what extent you can back-date your tax returns and claim these items.
The Australian Taxation Offi ce (ATO) has specified that quantity surveyors are the professionals suitably qualified to estimate deductions, and they must also be registered tax agents; Napier & Blakeley are both of those.
is a director at Napier & Blakeley, the first provider of depreciation schedules in the Australian market (since 1985).
p: +61 2 9299 1899, w: www.napierblakeley.com
While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.