Depreciation and Natural Disasters: Everything You Need To Know
A natural disaster could have a devastating effect on your investment property in Australia. You may need to get a new depreciation schedule to account for any repairs you make. Here’s what you need to know.
You cannot underestimate the effects natural disasters can have on an investment property. Australia deals with such disasters, and other issues, on a near-yearly basis. If such an issue affects your property, you may have to undergo a period of rebuilding. You’ll need to replace any assets you’ve lost, and possibly renovate or rebuild parts of your investment property in Australia.
This could make you wonder how natural disasters affect your rental property depreciation rates. On the one hand, you may have to pay out of pocket to bring your property back up to code.
After all, your insurance policy may not cover unforeseen circumstances. On the other hand, any improvements you make to the property improve its value. Your construction work could allow you to make more tax deductions. Australia has various regulations that ensure full compliance in such situations.
There are three situations you may find yourself in following a natural disaster. You’ll usually have to do at least one of the following:
- Repair any damaged assets
- Replace damaged assets that you cannot repair
- Improve or upgrade an asset in the wake of the disaster
You must approach each situation differently to maximise your ability to claim depreciation. Let’s look at each individually.
Repairing Your Assets
If you make any improvements to the asset, you cannot claim it as a repair. This includes any physical changes to its appearance, or altering the asset’s functionality. These are upgrades, and you must treat them as such.
So, what can you claim for when repairing an asset? It differs depending on whether you have insurance.
If you have insurance, you can claim for the cost of repairing the asset. However, you must also declare any sum you received from your insurance policy. This will have a direct effect on your tax deductions. Australia does not allow you to claim the full cost of the repair if you have insurance.
However, those without insurance can claim the full cost. This is because you won’t have received any help in making the repair.
Replacing Your Assets
On the face of it, replacing an asset seems simple. If you can’t repair your previous asset, you must purchase a replacement. You can then claim for this replacement on your tax returns.
However, the issue of improvement comes into play again. The asset you purchase must have the same specifications and functionality as the damaged asset. Any improvements move the asset into the final category, which changes how you claim for it. Simply put, if the replacement isn’t like-for-like, it’s an improvement.
If you have insurance, you have to make several adjustments to your depreciation report. You have to account for both Capital Allowance, and Individual Depreciable Assets.
Those without insurance must scrap the depreciation value of the previous asset. Replace this with the new forecast for the replacement asset.
Making Improvements or Upgrades
Anything that improves the original asset is either an improvement or an upgrade. This includes changes to appearance and functionality. You may also have to claim on the asset as an upgrade if it has different specifications to the original asset.
So, how do you handle the depreciation? If you have insurance, you take the same action as you would when replacing an asset. Adjust your depreciation report to account for the Capital Allowance. Don’t forget the Individual Depreciable Assets either.
If you haven’t got insurance, you must get arrange a new depreciation forecast for your improved asset.
Working with a Quantity Surveyor
In all cases, work with a Quantity Surveyor to make your adjustments. These professionals will help you to forecast your depreciation tax deductions. Australia is home to many Quantity Surveyors, so do some research before selecting somebody.
The role your Quality Surveyor plays depends on your previous actions. If you had your property assessed before the disaster, your surveyor will make minor adjustments to your previous report. This costs less than a full report.
However, you will need a full depreciation report if you didn’t already have one. This takes some more time and money. However, the report will ensure that you claim all the depreciation you’re eligible for.
The Final Word
A Quantity Surveyor can help you to maximise your depreciation claims after a natural disaster. Arrange a survey as soon as possible to ensure you don’t lose more money than you have to.
Washington Brown maintains a team of expert Quantity Surveyors. Contact us today to find out more.