The COVID-19 pandemic has forced many businesses to reflect on “industry norms” and the way they operate. We are no exception.
At Washington Brown we believe in researching each property and advising clients on the best way to approach achieving the maximum depreciation in the most cost-effective way.
Not EVERY property needs to be inspected in order for the maximum claim to be achieved.
This USED to be the case – but the tax legislation recently changed and property investors can no longer claim depreciation on items like ovens or dishwashers that are not brand new.
So NOW you can only claim depreciation on the structure of the building like concrete and bricks for 2nd hand properties.
If you BUY brand new items like carpet and blinds, you can still claim depreciation but it must be based upon the purchase price (not an estimate).
In the OLD days, we used to visit the property so we can value these items individually, the ATO put a stop to that.
Our Commitment to Property Investors Moving Forward
If we determine that an inspection is NOT required to ensure the maximum depreciation claim – this will reduce our fee AND you’ll receive the report sooner. Let Washington Brown work out the best depreciation plan for your property here.
Here are 5 reasons why SOME properties do not require an inspection:
Extensive Database – In 40 years we have amassed an extensive database of construction costs for the majority of residential and commercial buildings around Australia.
We have the costs – We are familiar with your building and as such, we already have the construction costs on file.
Plant & Equipment no more – You have purchased a second-hand property so you cannot claim on the existing plant and equipment components.
Online data – There is an abundance of detailed information and pictures of your specific property available online (both publicly and via subscription-based industry databases).
You have the costs – Your property is a brand new build and you have access to the construction cost, plans and inclusions list.
Here are 5 reasons why SOME properties STILL NEED an inspection:
Your property is unique – Your property is classed as High Spec/Luxury/Non-Standard and therefore not typical. An inspection will ensure the maximum deductions by ensuing all facets of your property are assessed and included.
Non-residential – This means you can still claim the full benefits of depreciation including the Plant & Equipment (carpets, blinds, etc.)
Renovated – Your property has been substantially renovated. There is insufficient information online and as such an inspection is necessary to maximise the depreciation.
More information required – We do not have access to sufficient information specific to your property. We, therefore, need to acquire this via an onsite assessment.
Plant & Equipment – Your property qualifies to claim Plant & Equipment deductions, an inspection ensures no assets are missed, which means your deductions are maximised.
Myth 1: The Commissioner’s effective life ruling must be used for all assets, no exceptions.
Truth: The Commissioner of Taxation’s ruling only applies to new depreciable assets.
In 2015, the commissioner wrote in the ruling that the effective life for new internal window blinds is 10 years. He does not mention that the effective life for second hand internal window blinds is 10 years also. So, if you have purchased a 5-year-old building with 5-year-old internal window blinds, you are not able to depreciate the blinds using a 10-year effective life.
A quantity surveyors role is to maximise depreciation deductions for the client. In order to do this, they must assess the effective life of second hand assets. And not just assume all of the assets in the property are brand new assets.
Also, it is important to note that if an asset is not listed in the depreciation schedule, it does not mean you are not able to claim for that asset. If it is a depreciable asset, you are able to claim it!
If an asset is purchased after the completion of the report, or you did not provide the information to the quantity surveyor, your accountant is able to include the asset for you.
Myth 2: If the assets in the property are destroyed I am able to claim the balance of the depreciation.
Truth: Some of this myth is partly true. The Division 43 capital works states that where a taxpayer’s capital works are destroyed, a deduction is permitted under the Undeducted Construction Expenditure rule.
However, if they receive an amount under a different insurance policy for the destruction of the assets, they are required by law to reduce the Undeducted Construction Expenditure by that amount.
Under Division 40, if a taxpayer ceases to own a depreciating asset (either sold or destroyed the item), or does not use a depreciating asset (no use for it any longer), a balancing adjustment will occur.
A balancing adjustment amount can be calculated by comparing the asset’s termination value (sale proceeds) and its adjustable value (written down value). If the termination value is greater, you include the excess in your assessable income. However, if the termination value is less, you deduct the difference.
Myth 3: Once the depreciable asset is found, you can claim depreciation on it.
Truth: Through past experiences, I have learnt that most investment home owners use their properties at some point during the year. This, however, creates incorrect figures in their tax depreciation schedule.
The purpose of a depreciation schedule is to inform a taxpayer on what they can include in their tax return. Without considering whether or not there has been private use of the property, or figuring out how to adjust the depreciation amounts to the correct sum, is at best misleading and at worse illegal.
Myth 4: All costs in acquiring a rental property should be able to be depreciated in one way or another.
Truth: This has mostly been covered by Myth 1 already. But this is the most common myth so I am going to explain it in more depth.
I have found that QSs are continually finding any asset to attach any and all costs to in order to claim a deduction, without properly following the laws.
For example, an investment property owner’s fence is damaged and the owner spends money on the repairs. The QS sees the cost the owner has spent and includes that whole sum in their depreciation schedule, depreciating it over 40 years at 2.5%. This is wrong.
A repair should be claimed at 100% in the year in which it was incurred.
Myth 5: Once I have spent money on a asset or a capital work I am able to claim it.
Truth: Under Division 40, you are only able to start depreciating an asset once it has been “used or installed ready for use”. Not as soon as you have paid for the asset.
For capital works under Division 43, you can claim deductions only once construction has been completed.
Myth 6: If I am unable to find the depreciable asset in the Commissioner’s yearly ruling, I cannot depreciate it.
Truth: The intention for the Comissioner’s ruling is to estimate the effective lives of assets. Not to decide what is a depreciable asset.
A depreciable asset is defined as an asset with a limited effective life. Therefore they are expected to decline in value over time.
Myth 7: Your assets are always deducted at 2.5%.
Truth: The rate at which assets are deducted is almost always 2.5%. However, there is one time you can get 4%.
However, there are times when a 4% deduction is applicable.
For example, a 4% rate will apply on an income-producing use of a building regarding an industrial manner.
Property depreciation schedules refer to an accounting process used to calculate the value left in any given property or equipment. These are procedures that any property investor should look into if you seek to maximise the return of your property at the end of each financial year. You’ve may wonder – how does it actually work though and how can you benefit from a so called property depreciation schedule?
Preparing an investment property depreciation schedule
Capital works refer to the “building write-off”; tax deduction benefits that you can claim based on the structural condition of the property itself and the permanent assets contained within. Owners of a property built after 1987 are eligible for such a tax deduction which can be as high as 2.5 percent based on the age of the property in question. Plant and Equipment on the other hand pertain to tax deductions for all removable assets found within the property as these items have limited service life and naturally decrease in value over time.
How much of a tax benefit can you expect from property depreciation schedules?
Well that depends – what type of property do you have, the age of the property and its manner of use. Properties, whether residential or commercial, are eligible for claim depreciation which is surely of great help to an investor come tax time.
Obtaining the maximum tax benefit from an investment property depreciation schedule requires extensive knowledge and skills in areas dealing with construction costs and the applicable tax legislation’s. To this end, you’d want to consult with a qualified quantity surveyor who can help you prepare a depreciation schedule to better secure your interest at the end of the financial year.
Looking to get started with some of the best quantity surveyors in the country? You can expect nothing less out of Washington Brown! Call us today on 1300 990 612 and arrange a consultation with a skilled and highly reputable expert when it comes to property depreciation schedules.
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