It’s that time of year again when accountant’s offices are a hive of activity with shoeboxes of receipts being dumped on desks and excel sheets being deciphered and dutifully turned into tax deductions. For property investors, the tax season should be a time where a little bit of knowledge and planning results in some significant deductions and, hopefully, a healthy refund! If the tax season is a time of year you dread, you’re probably not alone. However, with a good accountant and your property related tax deductions in order, the tax season could quickly become your favourite time of year.
With this in mind, we’ve put together a list of some of the important things you need to know about property tax depreciation this tax season.
1. It’s extremely rare for there to be no depreciation available, even in an older property
The best way to ensure you’re not missing out is by speaking with a qualified Quantity Surveyor. Many investors own property which they don’t believe is likely to have any depreciation deductions available. Most often, this is simply not true. Even properties constructed in the 1960s and 70s are likely to have significant depreciation deductions available. Most properties of this age have had renovations completed over the years. It doesn’t matter if you’ve made no improvements to the property yourself as renovations completed by the previous owner will attract depreciation deductions that you’re entitled to claim. If the kitchen has been updated, or the bathroom has been re-tiled, or it’s had a coat of paint there’ll be something there for you to claim.
2. If you’ve only just purchased a property, don’t wait until next year to organise a depreciation schedule
We recently wrote about an exceptionally average property that returned over $3,000 worth of depreciation deductions in 59 days. You can read the whole article here https://www.mcgqs.com.au/blog/average-house-3000-worth-of-depreciation-deductions-in-59-days/ but, in short, it doesn’t matter how many days prior to the financial year you’ve purchased the property, there’s likely to be some great deductions due to tax legislation such as 100% deductions and low value/cost pooling. The easiest way to explain how you can achieve some great deductions in a short time is by discussing 100% deductions.
If the asset cost $300 or less you can claim an immediate deduction for the cost of the asset (to the extent that you use it for a taxable purpose). You can’t do this if the asset is one of a set of assets that cost more than $300 – for example, if you buy four dining chairs each costing $250, you can’t treat them as separate assets to claim an immediate deduction. Even still, within an investment property you’ll often find assets like bathroom accessories, door closers, ceiling fans and sometimes even range hoods all with a value of $300 or less. If the total value of these assets is $600, then that’s an immediate $600 deduction whether you bought the property in May or the end of June. One important thing to remember is that it’s for assets with a value of $300 or less – not less than $300 as many quantity surveying firms have been reporting online and in investment magazines this season.
3. If you’ve never claimed depreciation, you might have a hefty back claim
If you purchased your property a few years ago and you’ve never had a depreciation schedule, chances are you’ve missed out on some deductions. The bad news here is that investors in the past were able to access up to four financial years of back claim, but that has changed to two financial years. However, those two financial years can certainly add up. We’ve had residential property investors with back claims over $15,000 and commercial property owners with back claims that would cause an accountant sleepless nights!
The good news is that depreciation reports will start at the settlement date and show any depreciation claims for previous financial years you may be entitled to. Some investors have been able to receive rulings from the tax office allowing them to amend several years of claims. This allows investors to access their full back claims. Be sure to talk to an accountant with specialist investment property knowledge to ensure you’re not missing out.
4. Make sure to itemise your repairs and maintenance costs
At this time of year we’re inundated with carefully itemised spreadsheets from property investors showing us what they’ve spent money on. There might be hot water system repairs, touch up paint jobs, new driveways, light globes and a multitude of other improvements. Not all of the items listed in this example are treated the same way. Taking those items as examples, the new driveway is considered a capital improvement, or division 43. This means it will depreciate at 2.5% of its value each financial year for 40 years. Things like hot water system repairs and touch up painting are more likely to be considered as repairs and maintenance. This distinction is important because repairs and maintenance expenditure can be claimed by your accountant at 100%. Whereas if it was to be included in a depreciation schedule, it would likely only return 2.5% per year. Why wait 40 years to claim the full value when you can do it in one?
When we see these spreadsheets we highlight the items we consider to be repairs and maintenance and send them through to the investor’s accountant. The accountants are always happy to have these costs itemised for them and it certainly saves them time going through the spreadsheet again themselves. This is all part of the MCG service and its part of what sets us apart as depreciation experts dedicated to achieving the best results for our clients.
5. If you’re renting a room in your house or have a home office you can still claim depreciation
We recommend clarifying your personal situation with your accountant, but it’s important to note that many investors are unaware that they’re entitled to claim depreciation deductions if they have a room rented out or operate a business from home. In the case of renting out a room in your private place of residence, your accountant will normally use a formula such as the size of the room divided by the total size of the house to calculate the percentage of the property that is income producing. So if you’re renting out 25% of your house, and declaring the rental income of course, you’ll have able to have a depreciation schedule completed and claim 25% of the total deductions. Even with only 25% of the total deductions this can be thousands of dollars a year on newer properties. Not only are there depreciation deductions, but interest deductions and other such property related expenses which become partially tax-deductible. Whilst Quantity Surveyors are registered tax agents, we are not able to offer accounting advice. Always check with your accountant to see what you’re entitled to claim.
We could certainly talk your ear off about all the important things to consider at tax time, but this list gives you a reasonable head start. Engaging a specialist in depreciation schedules such as MCG means you don’t have to worry!
The best advice we can give at tax time is that a phone call or email costs nothing. If you’re not sure what your entitlements are or whether it is worthwhile having a report prepared, with a few simple questions we can give you a good idea how worthwhile a depreciation schedule might be.
We offer a guarantee that if the report isn’t worthwhile, it will cost you nothing. Our fee is also 100% tax-deductible. Get a payout, not a pittance this tax season by ensuring you’re maximising your depreciation entitlements. Call us on 1300 795 170 or contact us via the website www.mcgqs.com.au