When investing in property you will want to make sure you are claiming as many Tax benefits allowable by the Australian Tax Office, to maximise your cash flow.
The amount that can be deducted depends on the age and value of the building and it is advisable to have a tax depreciation schedule completed by a Quantity Surveyor which will itemise the age of the property, what materials it is built from, the internal fittings such as carpets, window treatments, appliances etc. An estimated value is placed against these various items and they are depreciated, depending on their age and value.
The financial benefits of such a depreciation schedule can be large, especially for new properties which could be up to $10,000 each year. Ideally, it helps investors reduce their taxable income, pay less tax and improve cash flow.
See below our top questions and answers about the benefits of using a Tax Depreciation Schedule:
1.What is a Tax Depreciation Schedule (also known as a property depreciation report)?
A comprehensible list of all the property allowances claimable under the Income Tax Assessment Act. It is a tool used by property investors to show the amounts allowable as deductions in your annual tax return, resulting in significant tax savings each year of ownership of the property.
It allows you to claim a tax deduction for wear and tear over time on an investment property. It allows you to claim on the construction costs of the building and also be able to claim on internal items like ovens and carpets.
Put simply, property depreciation basically reduces your taxable income, optimising the financial return on your investment, allowing you to claim the maximum benefits.
2.What allowances are available?
The following allowances, where eligible, are summarised in a yearly cash flow showing the amounts
- Depreciating Assets
Depreciating assets which include items such as blinds, ovens, stove tops, carpets, and hot water systems are written off over a number of years based upon their effective life determined and are calculated from the settlement date of the property.
- Capital Works Deductions
Capital works deductions are based upon the historical construction cost of the property and vary depending on the commencement date of construction and type of building.
Residential properties can be written off at 2.5% per annum for buildings constructed after 15 September 1987. If construction started between 19 July 1985 and 15 September 1987 then it can be written off at 4% per annum.
- Structural Improvements
Structural improvements such as foot paths, fencing and other hard landscaping can be written off at 2.5% per annum if construction started after 27 February 1992.
3. Can I also claim the cost of the land?
No, unfortunately this is non-eligible and will be excluded from the depreciation schedule.
4. How long does the schedule last for?
You only need to get one report done, which is valid for 40 years – unless you conduct substantial works or alterations on the property and then you may look to get an updated one. Your accountant will be able to look after most items of additional future expenditure such as new carpets, blinds, etc.
5. I haven’t previously claimed any depreciation. Can I still claim?
Don’t fret. The ATO allows you to request an amendment to your tax return within 4 years. You can therefore backdate your tax claim to take into account of your depreciation allowances accordingly.
6. How do the 2017 Federal Budget changes affect me?
The great news is that if you purchased a brand new property or a property in a company name, you can continue claiming depreciation as you would have before the Budget.
If you purchased a second-hand, residential property in your name or SMSF after 9th May 2017, you can not claim depreciation on ‘previously used’ plant and equipment. You can still claim deductions on the building allowance (bricks and mortar) of the property, which typically represents about 85% of the construction costs.
What Next?
If you have any questions regarding our content or would like a complimentary consultation where we can show you the most effective strategies you can use to eliminate your tax legally. You can email us at info@curtispropertygroup.mysit3.com or call our office on 08 6323 2306 or register for your free consult here.
For more articles about being a successful property investor, see:
3 Ways To Better Prepare for End Of Financial Year
Top Tips For Landlords – How To Rent Your Investment Property Successfully
Ways To Create And Maximise Your Wealth Opportunities With Property
