The Ultimate Guide to Claiming Capital Works

Claiming Capital Works

Find out What Capital Works Are and How You Can Claim Them

Not all people buy an investment property in Australia and leave it just the way it is. Many invest in improvements, so they can charge more rent to tenants. Buying a property and making improvements to it is one of the best investment property tips for beginners in its own right. But did you know there are plenty of tax deductions in Australia that you can claim for the extra features you build?

It all comes down to capital works. Also known as Division 43 of the Income Tax Assessment Act (ITAA), capital works relates to the work and materials you spent money on to build the house.

Such costs include the following:

Beyond these practical costs, you can also claim tax deductions in Australia for some of the fees associated with construction. For example, you can claim for the fees you pay to surveyors, architects, and engineers. Additionally, you could also claim for the money you spent on acquiring building permits for the work.

Can I Claim Capital Works?

Depreciation CalculatorIt depends on your situation. Your building needs to generate income, which means it must be an investment property in Australia. If the building has produced income within one financial year of your claim, you can claim tax deductions as part of Division 43 of the ITAA.

As for your own status, it can vary. You could be an individual investor or member of a trust. Companies can also claim for capital works, as can the managers of superannuation funds.

How Do I Calculate My Capital Works Deductions?

The first thing to remember is that any valuations you have for the work are not relevant. Your capital works tax deductions in Australia must relate to the actual construction costs.

There are two rates may apply to your capital works – 2.5% and 4%. Which of these is relevant to your work depends on several factors. These include when you started construction, how you use the capital work, and the type of work undertaken. Furthermore, you have to take the amount of time the capital work generated an income for during the last financial year into account.

It’s best to speak to a professional to find out which rates apply to your capital work. Making claims you’re not entitled to could land you in trouble.

How Do I Make a Claim?

You can make claims for tax deductions in Australia on any capital works for a maximum of 40 years after the construction completion date. However, you’ll also have to provide several details in your claim, which include the following:

Depreciation Quote ScheduleSometimes, it’s difficult to determine the actual construction costs. You may have lost some receipts along the way, which means you need an estimate. This must come from a quantity surveyor, or an independent third-party who holds similar qualifications to a quantity surveyor.

The estimate your quantity surveyor produces will consist of a schedule for all the capital works undertaken. It also creates a forecast for the tax deductions in Australia that you can claim on the work. Take this schedule and use it to complete your tax returns. Also, bear in mind that the estimate cannot come from a real estate agent or accountant. The Australian Taxation Office (ATO) will refuse your claims if your estimate comes from the wrong source.

How Does Capital Gains Tax Relate to Capital Works?

Any capital works that you claim must be taken into account if you decide to sell the property. You will use them to figure out your capital gains or losses.

You must deduct your capital works claims from the base cost of the home. The amount of these deductions will affect the amount of Capital Gains Tax (CGT) you pay. If the deductions result in you making a loss on the property, you may not have to pay any CGT.

Commercial Space Deductions

claiming commercial deductions

Make Sure You Claim All Depreciation on Your Commercial Real Estate

If you’re thinking about buying commercial real estate in Melbourne, you need to prepare yourself. Many people fail to claim the commercial tax deductions in Australia that are due to them. This results in thousands of lost dollars.

You can claim for all sorts of things on your commercial real estate property. For example, you can claim deductions for the wear and tear of your fittings, furniture, and the structure itself. In fact, making the right deductions at the right time can affect cash flow. You can change a negatively geared property into one that enjoys a good cash flow.

So now you’re probably wondering how to maximise depreciation on your commercial investment property in Australia. Our guide will show you how.

Get the Ownership Structure Right

How you buy your commercial property is just as important as the type of property you buy. You need to have the right structure in place if you’re going to claim the maximum depreciation.

For example, you can increase your deductions if you buy the property using a trust. The same is true if you buy with your self-managed superannuation fund (SMSF). In both cases, you can split your deductions. You can make claims on the building as a standalone entity. Furthermore, you can also claim on any tenancy assets. However, you must operate a business in the property to do this.Depreciation Quote Schedule

Furthermore, you can claim for any capital works you undertake during your ownership. These can include extensions and many other general improvements. Finally, if you occupy the building as a business owner, you can also claim depreciation for any fixtures or fittings. Again, you must use these as part of your business operations.

Maintain Your Records

It should go without saying that it’s vital that you maintain accurate records if you want to claim commercial tax deductions in Australia. However, a remarkable number of people don’t do this.

Document every expenditure that relates to the building. These include both the immediate and ongoing costs. Furthermore, you should add day-to-day expenditure to the list. Keep anything that relates to a financial transaction involving your building. These records can help you to claim more.

Use a Quantity Surveyor

Every commercial property investor should employ the services of a quantity surveyor. These professionals can help you to create depreciation schedules. A good schedule ensures you can claim as much as possible on your property.

A quantity surveyor will carry out regular inspections of your property. These help to determine what deductions you can make each year. They’re ideal for long-term planning as well. A good depreciation schedule will lay out how to claim deductions for the next 40 years.

Furthermore, quantity surveyors understand how to maximise your depreciation based on your timeline. You may only intend to invest in the property for a short period of time. That’s okay. A good surveyor will take this into account, just like they would for a long-term investment.

It’s likely your surveyor will recommend the diminishing value method if you’re a short-term investor. This assumes the value of your assets depreciates most during their early years. As a result, you can claim for more depreciation in the short-term.

Depreciation CalculatorLong-term investors may prefer the prime cost method. This assumes uniform depreciation over the lifetime of your assets. As a result, you claim the same amount each year, rather than the bulk in the early years.

Which method works best for you will depend on the time commitment you make to your commercial real estate investment. A good quantity surveyor can talk you through the different timelines.

Take Advantage of the First Year

Your first year of ownership is vital. It’s when you will set up the structure through which you will manage your commercial property for the years that follow. Getting things wrong during the first year makes things more difficult than they need to be later on.

However, you also need to take depreciation into account from the moment you invest in the property. This is where your quantity surveyor can help again. You may be able to depreciate some of your assets faster with a commercial property than you would a residential one. Your surveyor will point this out to you. As a result, you can make more upfront savings using depreciation, which means you have more cash to use during that difficult first year.

The Final Word

Maximising your depreciation from a commercial property isn’t easy, but you can do it. Use the services of a reputable quantity surveyor and don’t put anything off.

Remember that you can make claims for depreciation from the moment you invest in the property. Don’t lose money because you were slow on the uptake.

8 Tips To Maximise Your Tax Return

It’s hard to believe, but we’re approaching that time of the year again – tax time!

As the end of the financial year draws closer, you’ll likely start thinking about that big fat tax refund and what you can do with it. But first you need to make sure you maximise your cheque.

To help property investors get their fair share of the tens of billions in tax refunds handed back each year to individuals and put themselves in good financial stead for next year, we’ve put together the following tips:

Maximise your deductions

Depreciation Quote ScheduleThe easiest way to maximise your tax return is to maximise your deductions.

As a property investor, know all of the expenses you can claim as a deduction and make those payments before the end of the financial year.

Claim for everything you’re entitled to, no matter how small it is. Every dollar will contribute to your investment’s return – and your wealth.

As a guide, landlords can usually claim the following as tax deductions:

 

Some tax deductions allowed for investment properties are often overlooked and some, such as the cost of renovations, are included when they shouldn’t be. To get it right, consult a professional.

Don’t forget about depreciation

Up to 80 per cent of property investors are missing out on thousands of dollars in tax savings because they fail to take maximum advantage of depreciation.

Depreciation is a reduction in the value of an asset over time due to wear and tear, and for income-producing assets, can be claimed as a tax deduction.

There are two types of depreciation allowances for investment properties. The first is plant and equipment, which covers removable items such as dishwashers. The second is capital works on the building, covering the property’s structure. If the property was built after July 1985 depreciation can be claimed on both elements. (Deductions for plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

Depreciation is one of the key ways to maximise tax returns, and it can be done without spending a cent because it’s a non-cash deduction.

Get a professional quantity surveyor to prepare a depreciation schedule for you to maximise your deductions, with the fee also being tax deductible.

Prepay expenses

If you expect to have a lower income next year then consider prepaying expenses on your investment property, such as interest or other holding costs – for up to a year in advance – before June 30. This will give you greater deductions to reduce the tax payable on your higher income this year.

 maximise tax returnConsider delaying income

Minimise this year’s tax liability by delaying income until after July 1. For property investors this will largely be applicable to property you’re selling – if you know you’ll be up for capital gains tax, consider delaying the sale until next year.

Seek the help of professionals

Getting advice from a great accountant or tax specialist will pay off, saving you both time and stress, while also maximising tax return.

The fee will be tax deductible and if they do a good job you’ll get your money’s worth by getting the best possible refund.

Often a good accountant will find deductions you never even knew existed, and they’ll also make sure everything you claim is legal. This will avoid a visit from the taxman down the track.

Keep good records

Do you always find yourself scrambling to sort through the piles of papers at the end of the financial year, desperately trying to find receipts for your tax deductions, let Depreciation Calculatoralone trying to make sense of them?

While it can be tedious, you’ll find it’s much easier to be organised throughout the year. File away your tax documents so you know where they are come June 30.

This will enable you to maximise your deductions, as you’ll have every receipt and will be able to claim every single penny you’re entitled to. You’ll also be more accurate in what you claim and will have good records to substantiate your claims.

Do everything by the book

Investment properties can sometimes be targeted by the ATO, so make sure whatever you do to maximise your tax return is legal.

An accountant can make sure you claim only the deductions you’re entitled to claim, in the right way.

Remember, if you get audited it could cost you significant sums of money, so it’s not worth fudging the figures.

Claim Depreciation on your Overseas Property

overseas property

Fancy a villa in Tuscany? What about a condo in LA or a loft apartment in New York? Yes, please!

But the question everyone wants answered; can I claim depreciation on this property… The simple answer is yes!

Difference between overseas and Australian property depreciation

The main difference between an overseas property and one in Australia is in regards to claiming the building allowance. That’s the wear and tear on structural elements of the property like bricks and concrete.

With Australian properties you’re entitled to claim 2.5% of these construction costs per annum, as long as the property was built after July 1985. The rate for overseas properties is the same – but the date is different. Construction of an overseas property must have commenced after 1992.

So, the easiest way to maximise your deprecation benefits on an overseas property, is to look for a newer property that has been built in the last decade or two. Internal items like carpets, ovens, lights and blinds – can also be depreciated, as you would with an Australian property. This is often referred to as plant and equipment.

(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

A good place to start your research is on the ATO’s website. You can download a publication called Tax Smart Investing: What Australians Investing in Overseas Property Need To Know.

Research

Like any property investing, you’ll need to do your homework. This entails researching the local market, finding out about rental yields and occupancy rates. But the best Depreciation Calculatorthing about research nowadays, it that this can all be done online at the tip of your fingers.

The main barrier to depreciating an overseas property is working out the constructions costs, along with the expense of flying a quantity surveyor overseas.

Washington brown has a number of affiliations around the world. We regularly inspect properties in London and New Zealand. I even did an inspection in Koh Samui, Thailand recently.

So there you have it. You can still invest in overseas property and reap the benefits of the Australian Tax system’s depreciation laws. But remember, the property must have been build or renovated after 1992.

If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.

Tax Time: What You Can Claim

Tax time is creeping up on us! So I thought I’d provide a simple list of some things that you can claim on. And that will help you save some money.

If you’ve been reading this blog, you’d know by now that some things cannot be claimed as an immediate deduction. However, there are some that can be.

So make sure you don’t miss out on claiming them!

claim tax

So, what are these expenses that can be written off immediately?

Well here’s a list that will save you immediately. Make sure your accountant is able to claim these for you!

  1. Acquisition and Disposal Costs incurred to gain a tenant.
  2. Charges and fees such as body corporate charges and fees, council rates, lease document expenses, legal expenses, mortgage discharge expenses, tax related expenses, insurance, and interest on loans.
  3. Fees related to hired services such as property agents’ fees and commissions, quantity surveyor’s fees, pest control, cleaning, gardening and lawn mowing, and secretarial and bookkeeping fees.
  4. Expenses that cover utility bills such as water charges, electricity and gas, and telephone calls.
  5. Installation and activation charges for items in the property such as in-house audio and video service charges and servicing costs.
  6. Other miscellaneous expenses such as travel and car expenses, and stationery and postage.

Remember, these expenses can only be claimed if they were directly incurred by you and not the tenant. Depreciation Calculator

So if you are renting out your property, now is the best time to go over your receipts and check which expenses fall under the list and before you know it, you’ll have more deductions than you bargained for!

If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.

6 Reasons to Love Property

There are a myriad of reasons as to why I have been drawn to property

Below are the six main reasons:
love property

Reason # 1 – You can add value

One of the principal advantages of investing in property is that you can buy a rundown old property and increase the value of your investment by getting your hands dirty, or paying someone to get theirs dirty instead!

In comparison, it would be hard to add value to the Commonwealth Bank shares I own. Sure, I bank with the Commonwealth, but I don’t think my day-to-day savings account is going to add much value to the bank’s profits and in turn increase the value of my stock portfolio.

Admittedly, I can vote when it comes to the company’s annual general meeting, but are the voting rights attached to my 1,000 shares really going to make a difference?

For example, installing new carpet, painting and adding new blinds to an investment property will make an immediate difference to the tax returns available to an investor.

Reason # 2 – There is limited supply

A builder once said to me, “You can’t make property from a plastic mould”. I like the fact that property takes a while to plan and build Depreciation Quote Schedule because, in my opinion, the demand and supply equation has a lot to do with the price of property.

A development across the road from where I live in Bondi has been ‘in council’ for three years now. This means, it has taken three years for all the planning approvals to be passed – before construction has even started. And it will probably take two more years to build.

That’s five long years for the developer.

With shares, however, the company can make a capital raising at any time or issue options to directors or employees. This type of activity can dilute your shareholding making your piece of the pie smaller.

In contrast, you or the government can’t just issue another house and lot or land package in Bondi or any suburb you happen to like.

Reason # 3 – There are some capital gains tax exemptions

Unlike any shares I currently own, the home I live in does not attract capital gains tax (CGT) when I decide to sell it. The sale of your principal place of residence is one of the only assets that you won’t pay capital gains tax on. This has proved lucrative for many Australians, and I can’t see the law changing in this regard for a long time.

love property

Reason # 4 – It’s easy to KISS (Keep it Simple, Stupid)

I like property because it’s easier for me to understand compared to shares or other types of investment. Granted I work in the property industry, but I know if I buy a property for $500,000, I can get $600 a week rent. There will be expenses that I can work out and I can use the Washington Brown depreciation calculator to work out my depreciation claim. It’s simple, really! Have you ever read a share prospectus or company annual report and completely understood it?

Reason # 5 – I am the master of my own domain

I like property because I can be the master of my own domain. I can be the CEO of my property portfolio, the CFO of my investment and answerable to the board directors that I care about – my wife.

I don’t know about you, but I’m pretty sick and tired of golden handshakes to CEOs who have done the wrong thing to their staff or shareholders. I’m over self-interested company directors who pretend they have shareholder company value at heart. Do they really? As the CEO of my property portfolio I can guarantee I’m looking out for number one- myself!

Reason # 6 – It’s not a constant reminder

I like property because I’m not reminded of how much I have lost or made every day. Regular share market updates in the media mean you are constantly aware of the Depreciation Calculatorgyrations of the market and the value of your shares. And it’s really not necessary. I personally don’t wake up and wonder what the Nasdaq did overnight and I don’t want to worry about how that’s going to affect my share portfolio – if at all. If I need to have my property valued for any particular reason, for example if I plan to sell it or borrow against it, I will employ the services of a valuer. At all other times, as long as it’s not causing me any problems and the tenants are paying their rent, then I’d prefer to let it appreciate in value in the background without being a constant reminder.

Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!

How to Claim Low-Value Pooling

Immediately Write Off $300 and Low-Value Pooling

(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

Depreciation deductions are pro-rated depending on when you take ownership of a property. However, like with everything, there are exceptions to the rule.

For example:

claim low value pooling
A Sydney client of ours settled on a one-bedroom Chatswood unit on June 25th last year. The property was built in 1999 and the purchase price was $450,000. Yet, their total tax deduction, which was for five days only, was more than $5,000.

“What’s the catch?” I hear you ask. Well, there isn’t one! The ability to make such a significant deduction for just a short period of time is due to the immediate write-off and low-pooling of items that are classified as plant and equipment.

The costs of ‘small items’ (valued at $300 or below) and ‘low-pooled items’ (totalling no more than $1,000) should not be pro-rated, instead they can be written off immediately. You can maximise these items whether the property has been owned for 1 day or 365 days. And the age of the property is not relevant to claiming small items or low-value pooled items. Plant and equipment in properties of any age are eligible for depreciation allowances.

There is a saying that goes, “a dollar today is worth more than a dollar tomorrow”, so deduct these items as quickly as possible.Depreciation Quote Schedule

What if you are a joint owner of a property?

For example:

Say an electric motor to the garage door cost the owners of an apartment block $2,000. If there are 50 units in the block, your portion is $40. You
can claim that $40 outright as your portion is under $300. Provided your portion for any joint area is under $300, you can still write it off in your taxes.

Items that depreciation faster:

Another tip is to buy items that depreciate faster. Items costing between $300 and $1,000 fall into the low-pool category and attract a higher depreciation rate. A $1,200 television attracts a 20% deduction while a $950 TV deducts at 37.5% per annum.

Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.

Why do I need a Quantity Surveyor?

quantity surveyorYes, builders are good at building. However, that doesn’t necessarily make them good at maximising the depreciation allowances you, the
developer or investor, are entitled to.

That’s why if you have contracted a builder to construct your investment property, it definitely pays to have a quantity surveyor prepare a depreciation report for you.

In my two decades of being a quantity surveyor, I’ve never seen a builder’s depreciation schedule that I could not improve upon and thus, significantly increase the claim for the investor.

Some of the common mistakes I see in builder-prepared depreciation schedules are:

The last mistake is by far the worst, as this can cost you considerably.

(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

Let me give you an example;

Depreciation Quote ScheduleYou see, when a builder buys an oven for $800, that’s not what you pay for it. By the time the investor pays for this item, a range of other fees would have been included,
such as the architect’s design, transportation, installation and supervision. Next thing you know the real cost of this oven to you is $1,100, and it’s the real cost we’re after, not what the builder paid.

Now, that extra $300 on the oven depreciates at 20% per annum, rather than at the 2.5% building allowance rate. This means you can claim the depreciation much faster.

So at the end of the day, let builders build and let quantity surveyors save you money.

Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!