Properties and the plant and equipment assets contained within them all go through a gradual process of wear and tear.
Property investors are permitted by the Australian Tax Office (ATO) to claim tax deductions based on this deterioration. This process is called property depreciation.
Depreciation can be claimed for any income producing property and is a non-cash deduction, meaning that you do not have to spend any money to make a claim.
Investors can claim two types of property depreciation:
Capital works allowance (Division 43) is the deductions available on the structural elements of a building such as roofs, windows and doors. It is commonly referred to as ‘building write off’, and can be claimed against the building’s historical construction cost at a rate of 2.5% each year for up to forty years.
It is important to note, however, that while capital works allowance deductions can be claimed up to forty years after construction, this only applies to buildings constructed after 17 July 1985. Despite this, owners of older buildings are still eligible to claim depreciation deductions based on the plant of equipment items within the property.
These plant and equipment deductions are available for mechanical or removable assets. This includes common items such as carpets, hot water systems, blinds and light fittings. Each of these deductions is calculated using the effective life of the various assets (generally five to ten years). A dishwasher, for example, may be allocated an effective life of ten years and will be depreciated at 20% per year (under the diminishing method value of depreciation).
When claimed together, these deductions can produce a significant improvement to a property investor’s cash flow. Research shows that a standard residential property can expect $5,000 to $10,000 in deductions on average in their first year’s claim alone.
Despite the thousands of dollars of potential cash flow property depreciation offers 80% of property investors fail to make depreciation claims on their investment properties. By educating your clients on the benefits of property depreciation deductions you can add substantial value to the service you provide, greatly increasing the chance that they may return to your business in the future when expanding their investment portfolio.
To claim the maximum available depreciation deductions, a quality depreciation schedule is needed. Quantity Surveyors are one of the few professions recognised by the ATO as qualified to provide these depreciation schedules to property investors.
Article Provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.