The end of financial year is almost here and with it, property investors will be readying themselves to visit their accountant to complete their annual income tax return.
Every year the Australian Taxation Office (ATO) encourages property investors to be vigilant with their claims. It is therefore important for investors to seek expert advice on the deductions available.
A large percentage of investors fail to maximise depreciation deductions or make mistakes by not claiming the deductions for capital works or plant and equipment items correctly.
To ensure deductions are claimed appropriately, a tax depreciation schedule should be obtained from a specialist quantity surveyor. Below are some tips to help investors ensure they get the most from their depreciation schedules and improve the cash flow they earn from their investment property in the process.
A site inspection is perhaps one of the most important processes involved in arranging a tax depreciation schedule for a property. Not all depreciation schedule providers include one, so when you are calling to enquire about getting a report, make sure to ask if the property will be visited.
During the site inspection, a depreciation expert will take photographic records of all of the depreciable items found within the property as well as take detailed notes regarding structural items. This allows every item to be accounted for when the schedule is processed and your quantity surveyor should list depreciation deductions for each item individually as well as provide a total for each year over the effective life of the asset.
Depreciation for structural items (capital works deductions) should be outlined separately in the schedule to make it easier for an accountant to apply a claim correctly.
Owners of older properties often assume they are ineligible to claim depreciation deductions. This is in part due to restrictions the ATO place on claims for the capital works component of the property. Although legislation states that only the owners of properties in which construction commenced after the 15 September 1987 can claim capital works allowance, these restrictions do not apply to plant and equipment assets.
Older properties also have often experienced a renovation or had some of the items contained updated over time. Even if these renovations or improvements have been completed by a previous owner of the property, the new owner may be entitled to claim deductions so long as these changes were made within the ATO legislated dates.
If you already have a depreciation schedule, ensure it is kept up to date if you make any changes to the property. Repairs to fix damage or maintenance to prevent deterioration of items in a property can be claimed as an immediate 100% deduction in the year the expense has occurred.
Be careful, however, as if an item has been improved beyond its original state at the time of purchase, this will be considered a capital improvement by the ATO and must be classified as either capital works deductions or plant and equipment and depreciated over time.
An investor should contact their specialist quantity surveyor before completing any renovations that involve removing existing structures or plant and equipment assets. This is because there may be remaining depreciation deductions available for these items which can be written off. A process called ‘scrapping’ allows investors to write-off any remaining depreciable value for items in the year the item is removed.
An updated schedule should always be obtained after completing renovations or improvements to ensure that any new items are included for future depreciation claims.
Did you know that you don’t need to wait all year to take advantage of depreciation deductions? A Pay as You Go (PAYG) withholding variation allows individuals to vary the amount of tax withheld by their employer in each pay to anticipate their tax liabilities. This means investors can take advantage of deductions regularly, rather than waiting until the end of financial year for their tax refund.
To apply for a PAYG withholding variation, investors should speak with their accountant. They will provide advice on whether a PAYG withholding variation is suitable for an individual’s circumstances. They will then submit estimated financial information to the ATO. An investor can use a depreciation schedule provided by their quantity surveyor to support a PAYG withholding variation application. The additional cash flow that can be claimed from depreciation can reduce the tax an individual needs to have taken out of their pay.
Once the PAYG application has been processed, a property investor’s expected tax refund for the financial year will be estimated, allowing their employer to take less tax out of their wages. This allows the additional cash flow from depreciation deductions to be used regularly as needed, which can be quite handy when repairs and maintenance costs arise or to help reduce loan liabilities.
Quantity surveyors are one of a few select professionals recognised by the ATO under Tax Ruling 97/25 with the expertise necessary to estimate construction costs for depreciation purposes. Calculating deductions correctly without the help of a quantity surveyor can be extremely difficult, particularly as depreciation legislation is complex an often changing.
Using their affiliations with industry regulating bodies, quantity surveyors gain access to the latest information and resources. Check to ensure your quantity surveyor is an accredited member of the Australian Institute of Quantity Surveyors (AIQS) and The Royal Institute of Chartered Surveyors (RICS). If you haven’t yet engaged a specialist quantity surveyor, it is definitely worth a quick call to see how you can benefit from claiming tax depreciation on your investment property.
The cost of a depreciation schedule is 100% tax deductible and investors can also claim back two years’ worth of missed depreciation deductions if they have not been maximising or making a claim.
This article was written by Bradley Beer, CEO of BMT Tax Depreciation. Visit www.bmtqs.com.au