As a salaried employee people would assume you were mad if you refused to take any of the annual leave you were entitled to.
Likewise, your competitors would think there was something wrong if you owned a business in the service industry but neglected to invoice for your work.
Yet every year thousands of dollars go unclaimed by property investors who miss out on tax depreciation entitlements they are entitled to.
Tass Assarapin, partner with quantity surveying group Mitchell Brandtman, says any property that produces income will decrease in value over time as buildings and assets on that property wear out. This process is called depreciation.
“As a property owner you are entitled by the Australian Tax Office to claim the expense of depreciation over the years as a tax deduction. This helps enhance the value of your investment by putting more money in your pocket when you receive your tax return,” he says.
For the right type of property, such as a typical brand new residential property investment, this can result in a reduction of your tax assessable income by up to $15,000 in the first full financial year, Assarapin says, proving it’s a savings opportunity that few residential property investors can afford to overlook.
So what are the types of capital works or assets that can be claimed against?
Similar to how you can claim wear and tear on a work car that you own, you may also be able to claim wear and tear on your income-earning residential rental property.
Essentially depreciation can be worked out in two different categories: “plant and equipment” (which includes items such as dish washers, ovens, carpet, blinds etc), and “building” (incorporating structural elements such as concrete and brickwork).
Assarapin says for brand new properties, the cost of the construction works as a whole – including development professional fees – apart from soft landscaping can be claimed against, he says.
“For residential investment properties that are ‘second-hand’ (or second owner), only the capital works can be depreciated and not the plant and equipment.”
It should be noted that different rules apply to commercial properties and other asset categories. The type of building, its age, use and fit out are just some of the things that will impact the depreciation benefits you are entitled to.
Owners of residential investment properties and commercial investors, companies, tenants or trusts who hold commercial or industrial properties can all claim depreciation based on the diminishing value or prime cost methods of depreciation.
Under the diminishing value method, the deduction is calculated as a percentage of the balance you have left to deduct while under the prime cost method, the deduction for each year is calculated as a percentage of the cost.
To help boost their cash flow position and ensure potential savings are maximised, smart strata investors frequently purchase what is referred to as a Tax Depreciation Report by a registered tax agent to assist in their financial planning.
Financial experts such as John Symond, founder of Aussie Home Loans, believe there are numerous advantages to obtaining a schedule, most notably because:
- You only need to get the depreciation schedule produced once and it should contain expected depreciation amounts for up to 40 years;
- Some companies offer a money back guarantee on the cost of the report if you don’t get at least double the cost of the report back in your first tax return;
- The cost of the report itself should be tax deductible;
- The best time to get a depreciation schedule created is when you settle your investment property, but it can be done at any time, and even on very old residential investment properties (though if it was built before 1985 you might only be able to claim on plant and equipment); and
- Your accountant may even be able to claim depreciation backdated by up to two years, so you can recoup some additional cash back on previous years’ tax returns.
The ATO recommends that you only use a Qualified Quantity Surveyor to prepare a tax depreciation schedule, and enable you to claim the depreciation of your property against your taxable income.
Assarapin says that in addition to preparing a depreciation schedule, reputable and experienced firms such as his will consider all factors which may lead to added value in the report including repairs, renovations and demolitions.
For a special offer on your tax depreciation schedule, use the unique web code www.smartercommunities.com.au/mb to enjoy a discount from Mitchell Brandtman.