How do I backdate my investment property depreciation?

Posted on August 10, 2017 by admin

Investment property tax depreciation deductions can have a huge impact on the cash flow and profitability of your property investment.

Depreciation equates to ‘lost value’ due to the wear and tear of capital works (structural building elements such as concrete and roof tiles) and to plant & equipment (fixtures and fittings such as carpets, ceiling fans and window coverings).

Claiming tax deductions for investment property depreciation effectively lowers your annual taxable income – and therefore your annual tax bill – putting more cash in your pocket each year.

As the second-biggest property tax deduction (after interest expenses), it’s surprising how many property investors completely overlook depreciation deductions or fail to claim all the deductions they’re entitled to.

What if I haven’t been claiming depreciation deductions?

Your accountant can amend your tax return for the last two years to add investment property tax depreciation deductions. But first, you’ll need to engage a Quantity Surveyor to inspect your property and complete a tax depreciation schedule.

A tax depreciation schedule summarises all the deductions claimable for capital works and plant & equipment and maps out how much depreciation you can claim each year for 40 years.

Your accountant will use this tax depreciation schedule to amend your tax returns for the previous two years and to complete tax returns in the future.

Can I backdate more than 2 years?

Possibly, but probably not. While the ATO will happily amend tax returns from the previous two periods, they are quite strict about the two-year time limit.

That said, there are different rules for individuals, companies, trusts and self-managed superannuation funds so it may be worth asking your accountant to seek further amendments if you’ve held an investment property for longer than two years.

Don’t overlook depreciation

Engaging a Quantity Surveyor should be at the top of your “to do” list when purchasing an investment property. Depreciation deductions can contribute thousands of dollars to your investment portfolio each year.

Depreciation deductions often mean the difference between a negatively-geared and positively-geared investment property and can literally save you tens of thousands of dollars across the lifetime of your investment.

Speak to a registered Quantity Surveyor to make sure you’re claiming every investment property tax depreciation deduction you’re entitled to.

Draft Legislation for Depreciation Changes Issued by Treasury

Posted on August 3, 2017 by admin

On Friday the 14^th of July, the treasury finally issued their draft legislation relating to the changes to depreciation for plant and equipment items. Personally, the most positive thing about the draft is that it’s silenced the fear-mongering commentators saying that depreciation on plant and equipment would be stripped from new properties. This was never implied as part of the budget speech and it has been confirmed that new property will remain unaffected, such as with commercial properties.

The explanatory material released with the draft legislation highlights the governments fear about “refreshed” second-hand plant and equipment values. In an article by the Australian Financial Review (http://www.afr.com/real-estate/residential/landlords-face-loss-of-950-a-year-in-deductions-on-typical-renovation-20170518-gw7jod) the ATO anonymously referenced a depreciation schedule they saw with second-hand values roughly 10x what they believed to be reasonable. Unfortunately, rather than dealing with the offending firm(s), treasury and the ATO have teamed up to penalise all investors by scrapping all depreciation on previously used plant and equipment assets.

One particular firm has been heard saying that they get back more deductions than anyone else which is frustratingly misleading. One wonders whether they’re believing their own spin or are the offending party referred to above. Sure, there are some firms that aren’t depreciation specialists and will miss ways to maximise a claim, but once to get to the specialist firms, the ATO rules apply to everyone, and the estimated values should be similar.

The term “previously used” popped up several times in the legislation, and it does confirm that previously used assets are any plant and equipment assets that existed within a property prior to an investor purchase, whether it was owner occupied or tenanted. So, unless you either buy the property new, or pay for the assets yourself such as adding some carpet, you won’t be able to claim plant and equipment deductions. If you’re living in your property while you renovate it and then sell the property to an investor, the investor will have no plant claims as the assets are deemed previously used. This is not the case if you renovate your property while tenanted, you’ll be able to claim those plant values.

The treasury has suggested that these changes will fix the issue of “refreshed” 2^nd hand values. I cannot for the life of me see how this will fix the issue entirely, as the depreciation that you were able to claim under the old rules, can now be treated as a capital loss at the time of sale, reducing your capital gains tax. In sexy ATO speak: To the extent that an entity’s deductions for an asset are reduced because of these amendments, when the entity ceases to use the asset the amount of any balancing adjustment is reduced and the proportion of the decline in value of the asset is recognised as a capital loss.”

So, you buy a 5-year-old house for $500,000 with $20,000 worth of plant and equipment assets, sell it in a few years for $600,000 and the residual (left over) plant value is $5,000, then the $15,000 ($20,000 starting value minus the $5,000 residual value at sale) that you would normally have claimed as depreciation against your assessable income will now be a $15,000 capital loss.

On a taxable income of 45%, that $15,000 of plant deductions would have equated to around $6,750 back in your pocket. Now that it’s not a deduction and is a capital loss, you’d be looking at your $100,000 capital gain dropping to $85,000. With the 50% CGT exemption, you’re now looking at a $42,500 gain. Taxed at your 45% marginal rate, you’re incurring a capital gains bill of $19,125. Without the $15,000 capital loss, it would be $22,500. So you’re saving a difference of $3,375 in capital gains tax.

Sure, that $3,375 is a lot less than $6,750, but to say that there’s now no incentive to inflate the residual values of plant and equipment assets is misleading. There still exists the incentive, it’s just about half as enticing as it used to be. So, for me, it’s far from mission accomplished. Google hard enough and you’ll find some better ideas I have to fix the problem, but to keep this brief I want to move to some analysis.

We’ve not completed a tremendous number of reports for clients that exchanged after the 9^th of May just due to it only being July at the time of writing. However, we’ve analysed the first 8 reports we’ve completed and here’s the real-world impact of the changes.

So as you can see, it’s costing an average of over $5,000 worth of deductions within the first full year of claim and just under $20,000 for the cumulative first 5 years. Remember this is only for recent purchases of established residential properties, but it’s quite significant.

As written previously (https://www.mcgqs.com.au/blog/detailed-analysis-of-the-budget-changes-to-tax-depreciation-on-plant-and-equipment-budget2017/) we’ve calculated that in 83.9% of cases within our analysis of 1,000 schedules, an investor would still benefit from a depreciation schedule as building component deductions, new properties and renovated properties will continue to provide valuable deductions. With the capital loss announcement, it’s important to have a report to see the decline in value of your plant and equipment anyway. I’m sorry to have to tell those kindly people emailing me about how quantity surveyors are going to starve to death, that we’ll be ok for now, but thanks for taking the time to get in touch.

Is a commercial property investment something you should consider?

Posted on July 12, 2017 by admin

When the Federal Government announced 2017-18 Budget measures to limit tax depreciation claims against second-hand residential investment properties, market experts predicted that many investors would turn their attention to commercial property investment.

Is a commercial property investment something you should consider?

There are plenty of reasons to have a look:

Longer term tenants

A typical commercial property lease stretches from 5 to 20 years, offering stable income and lower management costs. On the other hand, a commercial property may lie vacant for much longer than a residential property. This scenario should be anticipated as part of your planning.

Higher cash flow

Commercial properties can provide impressive cash flow for their owners – often doubling the return on investment of a residential property. Commercial tenants generally pay higher rents, plus the tenant will cover expenses such as council rates, insurance, property management fees, etc.

Adaptable investment

A commercial property can be multi-use. An office space can be adapted into a retail store or refitted as a hairdressing salon. An industrial warehouse might be re-purposed down the track into a dance hall or accommodation. As a commercial property owner you can adapt to what the market needs, depending on council zoning and restrictions.

Tax depreciation deductions

Both commercial property owners and tenants can benefit from claiming tax depreciation deductions. As an owner, you can increase cash flow by claiming depreciation for capital works AND plant and equipment within the property. A registered Quantity Surveyor will help you maximise and make depreciation claims.

Diversify your property portfolio

Successful investors all say “don’t put your eggs in one basket”. Diversifying your assets is key to weathering financial ups and downs for long term wealth. Perhaps a commercial investment property is the perfect fit for your investment portfolio?

Of course, research is key. Factors such as location, market conditions, council restrictions, tenant quality, building characteristics and local infrastructure will affect cash flow, capital growth and overall profitability.

Examples of commercial property investment opportunities

Here are a few commercial property ideas to kickstart your research:

Hotels, motels, holiday resorts or time shares
Child care centres
Cafes, restaurants, function centres
Health care facilities and professional spaces
Retail or office spaces
Warehouses, factories, workshops
Car parks and storage facilities
Gyms, sporting venues

How will changes to investment property depreciation affect you?

Posted on July 12, 2017 by admin

Investment property tax deductions hit the headlines when the 2017-18 Federal Budget was handed down on 9 May 2017.

As the second biggest tax deduction after interest, depreciation deductions against investment properties save investors thousands of dollars and can make or break the profitability of a property investment.

By claiming a tax deduction for the wear and tear of capital works (structural elements such as concrete and roof tiles) and plant and equipment components (such as curtains, bathroom fittings and screen doors) a property investor can significantly reduce their taxable income, and their annual tax bill.

Tax depreciation deductions have been boosting investors’ cash flow for years, however changes introduced in the 2017-18 Federal Budget will limit depreciation claims on investment properties purchased after 9 May 2017.

According to the new guidelines, a property investor will no longer be able to claim depreciation on plant and equipment assets installed by a previous owner. Only components that you have purchased yourself will be claimable.

Properties purchased before 9 May 2017 will be unaffected by the changes.

What deductions can you claim against a property purchased after 9 May 2017?

Capital works

Depreciation of the actual building is still claimable. Your Quantity Surveyor will still be able to prepare a tax depreciation schedule to ensure you claim all tax deductions you’re entitled to.

Renovation costs and plant & equipment assets you’ve purchased yourself

Similarly, your Quantity Surveyor can list any renovation costs and include them in your depreciation schedule. New assets you purchase yourself – dishwashers, blinds etc – should also be included in the depreciation schedule and claimed at tax time.

Everything – if it’s a newly built property

Brand new property? No problem. The Federal Budget changes only affect second-hand properties so you’ll be able to claim both capital works and plant & equipment deductions as usual.

So how will these changes affect the property market in general?

Experts predict property investors will hold investment properties for longer periods and they may also shift focus towards newly-built developments and commercial investment property opportunities.
Luckily, property investment is a long term game. A savvy investor can plan ahead by maximising tax deductions that ARE permitted while enjoying capital growth in what is still a strong property market. Speak to your Quantity Surveyor about how you can maximise depreciation as part of your investment property strategy.

Split depreciation reports are saving investment property co-owners thousands

Posted on June 23, 2017 by admin

Skyrocketing property prices are driving a sharp increase in people pooling their resources to get onto the property ladder. By combining assets to achieve better buying power and a bigger deposit, siblings, friends and business partners are making property ownership a realistic goal.

If you choose to buy an investment property as a co-owner you can also share ongoing costs and claim higher depreciation deductions at tax time.

Higher deductions? How?

With a split depreciation schedule.

All investment property owners can claim depreciation for capital works (structural elements such as bricks and concrete) and plant and equipment (carpets, fittings and fixtures). By having a registered Quantity Surveyor prepare a split depreciation schedule for an investment property, co-owners can increase their cash return during the earlier years of the investment.

Higher deductions for co-owners can be achieved two ways:

Low Value Pooling

Individual plant and equipment items valued less than $1000 are considered “low value” and can be depreciated faster and at a higher rate than items of greater value.

For example, a dishwasher would normally be depreciated at a rate of 20% over many years of its useful life. However, if the dishwasher costs under $1000, it can be depreciated at an annual rate of 37.5% after the initial year of purchase.

By using a split depreciation schedule, two co-owners with a 50:50 share in an investment property can enjoy this higher rate of depreciation for a $1,999 dishwasher – as technically they each own a $999.5 share in the dishwasher.

Tax depreciation claims at this higher rate help slash each owner’s tax bill and can boost the cash return of the investment property for both owners.

Immediate Write-off

Co-owners can split the cost/value of all depreciable plant and equipment items according to the ownership structure of their property investment. This can push more plant and equipment items to qualify for immediate write-off.

While most assets depreciate over several years, items that cost less than $301 can be claimed or “written off” in the financial year in which they’re purchased.

Co-owners with a 50:50 share in an investment property can immediately write of a $600 item ($300 each), reducing tax to be paid and boosting the investment property’s cash return for both owners.

Accurately calculating and claiming tax depreciation deductions can be complicated, which is why the ATO insists all tax depreciation schedules are completed by a registered Quantity Surveyor. A tax depreciation schedule is a worthwhile investment that literally pays for itself and can put thousands of dollars back in your pocket.

5 reasons to consider investing in commercial property

Posted on June 23, 2017 by admin

Investing in commercial property can seem daunting to the uninitiated. Here are five reasons you should consider taking the plunge:

Commercial properties can offer higher depreciation tax deductions than residential properties

While residential property investors can claim 2.5% annually for capital works, commercial properties can attract up to 4% of historical construction costs, depending on the property type and construction commencement date.

The ATO will also deem that some plant and equipment elements depreciate faster within commercial properties – a good example is carpet, which will wear faster in a restaurant or busy office than it will in a residential property. Both landlords and tenants may claim depreciation deductions for certain plant and equipment elements within a commercial property.

Many residential property investments won’t be as profitable from July 1

From July 1, 2017 deductions for plant and equipment within established residential properties will be greatly reduced due to “housing affordability” measures introduced in the recent Federal Budget.

Many financial commentators predict savvy investors will shift focus from residential property investment towards more cash-flow-friendly (and potentially much more profitable) commercial investment property opportunities.

Commercial property leases are usually longer

As a solid, long term investment, commercial property ticks plenty of boxes. A standard commercial property lease will see a tenant signing for somewhere between 5 and 20 years, with rent reviewed annually, usually in line with the CPI or 4% (whichever is higher).

Compared to a residential property lease, which is usually renegotiated every 12 months, a commercial landlord can effectively plan further ahead and enjoy lower tenant turnover.

Commercial tenants are responsible for more outgoings than residential tenants.

A commercial tenant has higher obligations in terms of managing and maintaining the property. Fit-outs are generally at the expense of the tenant and tenants usually pay outgoings such as council rates, insurance, land taxes, repairs and general maintenance.

You can claim depreciation deductions as both a commercial landlord AND a tenant.

By purchasing a commercial property via a self managed superannuation fund, company or trust, you can effectively pay yourself rent and claim certain depreciation deductions as both the property owner and as a tenant. It’s definitely worth considering if your line of work required physical premises.

Speak to your Financial Advisor about how owning a commercial property might fit into your investment strategy.

Plant & Equipment Depreciation Changes – 2017 Budget Measures

Posted on June 13, 2017 by admin

The announced budget changes by the treasurer Scott Morrison, effectively take a sledgehammer to residential depreciation legislation that hasn’t really changed since 2006. The Reserve Bank only has a blunt instrument to work with, in changing the cash rate to curb/stimulate inflation, but fiscal policy can be far more nuanced. The Government opted against a collaborative and refined methodology in favour of whacking things with a big stick.

Whilst we patiently wait for the new legislation to be drawn up, I’d like to offer up some alternatives to simply disallowing plant and equipment deductions on anything but brand-new assets.

In listening to the speech, the Government was looking to achieve two things;

A decrease in tax deductions for property investors; and
A way to ensure that as a property changes hands, plant assets are not repeatedly claimed, and in some circumstances, the total claims on an asset are higher than its original value.

Point two can be a difficult one to comprehend, and at first glance, it seems like the investor is claiming inappropriately. However, I’ll explain that this is part of the tax legislation.

Let’s consider a low-value object that exists in isolation. It could be a door closer, a ceiling fan, or really any plant item with an opening value (or cost if you like) of $300 or less. So, let’s say an investor buys a brand-new house, and this asset is a $180 door closer. The investor is entitled to claim the whole $180 as an instant deduction. A door closer has an effective life of 10 years, but the ATO allows these items not part of a set with a value of $300 or less to be a 100% deduction in the year of acquisition. Now, this has been the case for a long time, but where this can potentially get out of hand is when that investor sells their property to another investor. Let’s say they held the property for two years, so they’re now selling the property to an investor as a two-year-old property. Now, this door closer is, of course, two years old. Having a 10-year effective life, it’s not likely to be functioning any less like the manufacturer intended after only two years of use. It also has a value! What is the value? Well, it’s not new anymore and has had some wear, so it’s not going to be $180 anymore. Quantity Surveyors don’t appear to have a uniform means of calculating a written down value, but that’s a whole different article.

Let’s say we give the door closer the exact same value it would have had if the previous owner depreciated it under the diminishing value method based on its effective life, rather than writing it off at 100%. That would give it a value as a two-year-old door closer of $115.20.

So a Quantity Surveyor completes a depreciation schedule for investor number two and provides them with a $115.20 residual value for their door closer. Then elect to write that asset off at 100%, as they’re entitled to. See the problem now? The total deductions on that asset have now been claimed to a grand total of $195.20. We’ve now made combined depreciation claims higher than the brand-new value of the asset!

Is this investor being dodgy, sleight of hand by Quantity Surveyors? No. It’s the ATO’s rule stating you do not need to know what the previous owner claimed on the asset.
I’ll grant you that my explanation was a lengthy one, but you’ll be pleased by the brevity of my solution. Scrap 100% deductions.

I’m not in favour of this approach, but it’s a way of achieving the aims of the Government as per points 1 and 2, without completely destroying depreciation on established assets.

Investors would still be able to claim the depreciation on the door closer, but at the appropriate effective life (which the ATO give as 10 years) which equates to a depreciation rate of 20% of the balance each year under the diminishing value method, or 10% of the opening value using the prime cost method. So, it would take 10 years plus to get the whole value, rather than straight away in the first financial year, but the deductions are there nonetheless.

As for maximising Government revenue, or rather minimising tax deductions for property investors, there was a change announced to plant and equipment depreciation deductions on the 10^th of May, 2006. Yes, 2006 is not a typo. Again, this was another budget night change. Nobody seems to remember this, and maybe I’m the only true tax depreciation nerd left, but on that night, the Government changed the calculation for depreciation rates for the diminishing value method.
Some background, swift as I can for those falling asleep in the back. Of the two methods of depreciation, the diminishing value method is the most aggressive in the beginning and is overtaken only by the prime cost method after around 6-7 years. For this reason, most investors use it to get their deductions sooner rather than later. The way the depreciation rates were calculated for the diminishing value method was 150 divided by the effective life. So with the door closer it would be 150/10=15%.

On that fateful 10^th of May 2006 budget night, the calculation changed from 150 divided by the effective life to 200 divided by the effective life. So carpets, like the door closer, went from a depreciation rate of 15% to 20%. With most investors using the diminishing value methods, and properties changing hands relatively frequently, this resulted in higher depreciation claims and less revenue for the Government. A solution to problem 1? Put it back. Make the calculation 150/Effective life again. This would still allow investors to claim deductions on second-hand assets but would minimise the loss in tax revenue. I’m not really in favour of this change, but as per above, it would be favourable to the announced changes.

These are just two ways that the Government could have tweaked the legislation without taking a big stick to it. I’m not in favour of any changes that make things harder for investors as I believe rental accommodation is a crucial yet oft-forgotten component of housing affordability and reliance on Government pensions in retirement is far less favourable that self-funding your retirement through property investing. However, I yield to the economists far cleverer than I that say we need changes to depreciation to balance the budget, rather than tackling say, corporate tax evasion or the black economy.

These two suggestions are just what sprang to mind first, there is a myriad of other ways to achieve the implied budget aims without a blanket ban on plant and equipment deductions on established properties. If only someone would ask.

Analysis of the Budget Changes to Tax Depreciation on Plant and Equipment

Posted on May 10, 2017 by admin

UPDATED 11/5/2017

If you’re not already aware, last night’s budget announced some major changes to tax depreciation that will have a huge impact on quantity surveyors preparing depreciation schedules and residential property investors. I’ve been fielding calls and emails from accountants, investors and quantity surveying firm directors through the evening. There are two main ‘buckets’ of depreciation, there’s division 43 which relates to the structure of a building (concrete, timber, gyprock, tiling, cabinetry etc.) and division 40 which is plant and equipment items. Plant and equipment items are loosely described as items easily removed from the property without damage. Within a residential property, there are predominantly air conditioners, blinds and curtains, carpet, floating timber floors, ovens, cooktops, dishwashers, range hoods, hot water systems, security systems, smoke alarms and light shades. The list is quite long at around 150 individual assets, and apartment complexes will have a much larger list of shared plant and equipment items like lifts, fire indicator panels, swimming pool filters and the like.

The Government has just announced that there are now only two ways you’ll be able to claim depreciation deductions on plant & equipment items.

You buy a brand new residential property*;
You add the plant and equipment item directly yourself

This means that if you’re the second person to own a property, even if it’s only a year old, there will be zero depreciation deductions attributable to the plant and equipment items. This applies to residential investment properties where a contract was entered into from 7.30pm on the 9^th of May 2017. If you’ve purchased an investment property prior to that date, you’ll be able to continue to claim plant and equipment items until the values either run out, or you sell the property.

What does this mean in real terms for the depreciation deductions for property investors?

Thankfully we’d already begun an analysis of our last 1,000 residential depreciation schedules, albeit for a completely different purpose. Nevertheless, here are some of our key findings;

Of our last 1,000 schedules, 38.3% of them were purchased brand new and would be unaffected by the changes.
69.9% of the properties were built after the division 43 cut-off date of 16/9/1987, so there would be depreciation claimable on the original building structure
Of all the properties built prior to the cut-off date, 63.8% have been renovated to some extent by the current owner. The average total value of this renovation is $39,191

So the key takeaway is that if we remove from the 1,000 figure, all the properties that would benefit from a depreciation schedule (built after 1987, renovated to a significant extent by owner or previous owner) we’re left with 161 properties that would not have sufficient depreciation deductions to warrant having a depreciation schedule completed.

In some ways that’s good news for the industry, as 83.9% of investors will still have some worthwhile claims (at least $1,000 per year), and arguably the market for depreciation companies has not been cut in half. My cut-off point for ‘worthwhile deductions’ for those older properties was the average post-purchase renovation figure of $39,191, which I also applied to prior renovations.

If we look at an average $39,191 renovation, our analysis tells us to expect around $3,278 of that to be plant and equipment. Since plant and equipment depreciate at higher rates than the building structure, that has a big impact on the deductions in total.

Our analysis shows a first full year depreciation breakdown as follows:

Building Structure $897.83
Plant and Equipment $956.18 (under the diminishing value method)

As you can see, removing the plant and equipment deductions cuts the deductions roughly in half. Our analysis is slightly on the pessimistic side as it’s feasible a 39k renovation could have zero plant and equipment.

So according to MCG Quantity Surveyors analysis, whilst there’s still going to be enough value to justify a depreciation schedule in 83.9% of cases, the total benefit of the schedule will be diminished. Over our 1,000 residential schedules analysed, the average first year depreciation deductions was $9,407.73. For pre-owned investments only, that figure drops to $7,484.35. It’s reasonable to assume that around half of that value will be gone within the first year. On a 37% marginal tax rate, the after tax increased cost of ownership of your average established investment property will be around $1,300-$1,400 per year.

We urge accountants to direct investors to quantity surveyors to analyse the potential claims and caution property investors not to panic.

Do I think the 83.9% is a solid figure? Sadly not. The concerns is that investors will not chase their entitlements based on poor advice or misinformation about their entitlements. On the basis of 69.9% of properties qualifying for division 43 deductions on the original property, this is likely going to be closer to the true cut to the depreciation business. Of course again, misinformation may amplify the problem.

It’s a massive hit to property investors, but mostly to depreciation companies such as ourselves. The budget speech championed the role of investors in keeping rents down and providing accommodation to millions of Australians. This measure will increase the after-tax cost of holding a residential property and that cost will either be passed onto renters, or the supply of affordable rental properties will drop placing upwards pressure on rents due to demand.

This is a disappointing development and I urge the Government to consider the clear majority of investors that are simply holding one investment in the hope of self-funding their retirement.

*Some developers and quantity surveyors are concerned that plant and equipment items on new properties might be excluded. Given the intention of the measures was to stop investors from repeatedly depreciating old assets on the event of each new sale, I cannot see this happening. If you buy a new property, the assets have never been depreciated so the deductions should be available.

Mike Mortlock is a Quantity Surveyor and Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at www.mcgqs.com.au/

Changes to Depreciation Deductions for Plant & Equipment Items

Posted on May 9, 2017 by admin

The budget is only two hours old and I’m back in the office trying to come to terms with some pretty fundamental changes. To cut a long story short, from now on, property investors will only be able to claim depreciation deductions on plant and equipment items if they either;

a) purchased the asset directly themselves (i.e. added a new dishwasher) or;

b) bought a brand new property.

Up until now, when investors purchased an established home, quantity surveyors were charged with the task of estimating the residual or left over value of the plant and equipment assets. These are things like blinds, curtains, carpets, ovens, cooktops, dishwashers, hot water systems, light shades, security systems, air conditioners and the like. From now on, the only available claim will be on the construction component of the dwelling. This of course only applies to properties that had commenced construction after the 16th of September 1987 or properties renovated after 27 February 1992. To put that in perspective, a property built in the 1970s that was extended in 1998 for $50,000, will receive 2.5% of that value in depreciation each financial year for 40 years from the completion date of the works. Now the 50k of works cannot include those plant and equipment items mentioned above, it must be building works (division 43) only.

So 50k of division 43 only improvements would result in $1,250 worth of deductions per year. Plant and equipment items depreciate at much faster rates than standard building improvements, and would equate to roughly half of the total value of a depreciation schedule, though in this scenario it could certainly be double.

We were the first quantity surveyors to publish actual data on average residential depreciation deductions and our average total depreciation claim was $9,138 dollars. I’ll be pulling the exact plant figures out asap but it’s fair to say that between 40-50% of that value would be plant and equipment items.

This budget measure was supposedly designed to ensure that an asset could not be claimed multiple times by different owners. For example, you could purchase a new property with a $180 door closer and write it off as a 100% deduction. You could then sell the property to an investor two years later, who would then claim a 100% deductions for the residual value of the door closer, which might have dropped in value to say $140. So I think it’s fair to say that new properties will be safe from these changes. The ATO stated you did not need to consider or search for the depreciation claimed by the previous owner, so they created the problem in the beginning.

It’s a massive hit to property investors, but mostly to depreciation companies such as ours. We’re a small business employing a number of people to prepare depreciation schedules. We’ve just been blindsided by a change that could cost hundreds and perhaps thousands of jobs within the next few years. The budget speech just promoted the role of investors in keeping rents down and providing accommodation to millions of Australians. This measure will increase the after tax cost of holding a residential property and that cost will either be passed onto renters, or the supply of affordable rental properties will drop placing upwards pressure on rents due to demand.

This is a disappointing development and I urge the Government to consider the vast majority of investors that are simply holding one investment in the hope of self funding their retirement.

Mike Mortlock, Managing Director, MCG Quantity Surveyors

Maximise depreciation tax deductions when renovating an investment property

Posted on May 8, 2017 by admin

Are you planning to renovate your investment property?

A brand new kitchen, new carpets or a quick lick of paint – there are plenty of ways a well-considered renovation can boost the capital value of your property and attract higher rental income.

A renovation can also provide a tax-time bonus if you plan ahead and engage a registered Quantity Surveyor to help you to maximise depreciation deductions before you start, and post-renovation.

Follow this simple two-step process:

Step 1: See a Quantity Surveyor before you start

Have a Quantity Surveyor inspect, assess and record the value of items you’re planning to throw out as part of the renovation. Things like old window furnishes, certain floor coverings and other plant and equipment items should have a residual value that can be written off and claimed as a tax deduction. These “scrapping costs” can add up quickly, especially if your property isn’t very old, and can technically earn you money for nothing.

Step 2: Update your tax depreciation schedule post-renovation

When renovations are complete, you’ll want to ensure that you’re claiming depreciation for anything new and improved. Have your Quantity Surveyor re-inspect your newly-renovated investment property and complete an updated tax depreciation schedule. Your accountant can then use this document to claim maximum deductions at tax time.

Why is a tax depreciation schedule so important?

A detailed tax depreciation schedule is a low-cost investment that can literally save you thousands of dollars for every year that you hold an investment property.

Completed by a Quantity Surveyor, it is a summary of structural components (such as bricks and concrete) and “plant and equipment” elements (floor coverings, air conditioning, bathroom accessories etc.) that you can claim depreciation for at tax time. It outlines exactly how much depreciation you can claim on your tax return each year, for up to forty years.

Because claiming depreciation can considerably lower your annual tax bill, a tax depreciation schedule can mean the difference between a negatively-geared and positively-geared investment property.

To comply with ATO rules, an investment property tax depreciation schedule must be prepared by a qualified, registered Quantity Surveyor.

Author: admin