Let’s talk about bricks and mortar. Or what the Government calls the Building Allowance.
Whilst you can no longer claim depreciation on plant and equipment in second-hand investment properties, that’s the things like ovens, dishwasher etc.
You can still claim the structure of the building, that’s the bricks, concrete, windows, tiling, etc. provided the residential property was built after 1987.
And these costs typically represent about 85% of the construction cost of the property.
And that’s good news, but I want to turn it into great news!
Up until now, when you ordered a depreciation report, quantity surveyors give you a lump sum total for your building allowance, based on the government’s guidelines that these items last approximately 40 years.
But in our experience, that’s not true.
Investors tend to update things like kitchens and bathrooms every 20 years.
So Washington Brown has come up with the Building Allowance Maximiser report, and it’s the only one of its kind.
What it does, it splits the building allowance into different categories, based upon our research of what items wear and tear more quickly.
Which means, if you use our report, when you replace those items or update them, you’ll be able to claim the full amount as an immediate tax deduction.
Let’s say I bought a property 20 years ago, with a kitchen that cost $10,000 to build.
Now, because it’s halfway through its 40-year life, I’ve only claimed 50% of its depreciation, which is $5000.
When I remove it today, using Washington Brown’s new report, I’ll be able to claim the remaining 50% as an immediate tax deduction.
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:
The materials you use in construction, such as timber and tiles
New extensions, such as a garage
The construction of internal walls
Excavation of new foundations for your construction work
Improvements to the property’s structure, such as a new carport or fencing for the garden
Renovations to the bathroom and kitchen
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?
It 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:
Information about the type of capital work undertaken
The start and end dates for construction
Information about who did the work
The actual cost of construction, which is not the same as any valuations or purchase prices you have
Information about how the capital work generated an income for you during the last financial year
Sometimes, 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.
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.
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.
Long-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.
The fee you’ll pay for a depreciation schedule will vary. For example, you may pay anywhere between $275 and $800 for the report. This is a fairly standard price for an established residential home. All these properties aren’t brand new. This usually means you’ve purchased it from another investor or a former owner-occupier.
What causes this variances in price? It usually comes down to the quality of the service that the quantity surveyor provides. Paying less may mean that you save money in the short-term. However, it could also result in you claiming fewer tax deductions in Australia for your investment property in Australia.
The Timeline Process
You’ll need a depreciation schedule for any established investment property in Australia. This allows you to create a timeline that contains details about the property’s history. These details usually include information about the property’s renovation work. Either you or the previous owner may have carried out this work. It will also mention the cost of that work, along with the completion date.
Your surveyor does this so you can assign a new depreciation lifecycle to your second-hand assets. However, you can only do this on assets in a property that you purchased before the 2017 budget. You may not be able to claim tax deductions in Australia for a property that you bought after May 9th, 2017.
The purpose of your timeline is to show what tax deductions in Australia you can claim. It will also create a schedule for these claims. This allows you to maximise the depreciation of your second-hand assets.
What Do I Get at the Lower End of the Scale
Let’s assume that you have decided to work with a quantity surveyor who only charges $300. That’s a few hundred extra dollars in your pocket, but the schedule you receive may not be as detailed as you would like.
For example, most surveyors at the lower end of the price scale don’t usually provide the following:
The option to use low-value and low-cost pooling to increase the amount you can claim
Completion of additional searches that would have helped to find approved works that you can claim for
Full itemisation of the individual assets contained in the property
Effective valuations of your second-hand assets
Furthermore, you may find that a cheaper surveyor does not have the relevant skills or experience. As a result, you don’t get the most out of your assets. You’ll still get a depreciation schedule. However, it won’t allow you to claim as many tax deductions in Australia as you may be entitled to.
What Do I Get With a More Expensive Surveyor
More expensive surveyors tend to provide better depreciation schedules.
You’ll receive all the following if you pay more for your depreciation schedule:
A completely accurate estimation of every tax deduction in Australia you can make
Access to more knowledge with regard to the latest tax legislation
Checks to ensure your depreciation schedule meets the Australian Taxation Office (ATO) requirements
A more reliable point of contact to ask questions
Such surveyors also have more experience, which they can use to your advantage. It’s unlikely you’ll present them with any scenarios that they aren’t familiar with.
What about Brand New Properties?
That covers any second-hand assets that you have in an established residential home. But what if you’ve bought a new property? These won’t contain any second-hand assets that need reporting on.
As a result, you can expect to pay less for your depreciation schedule. This is because most newly built properties come with more information. Your surveyor can use this to create more accurate estimates. They’ll have access to the costs of construction and the value of the assets that came with the property. This means they don’t have to carry out the detailed inspections that they would to estimate the value of second-hand assets in an established home.
Even with this lower cost, you will still receive the same level of service. The depreciation report will apply the new assets the home contains to either an immediate or long-term pool. This ensures you can claim the maximum tax deductions in Australia on your property.
How Much Does a Depreciation Schedule Cost for a Commercial Property?
Prices may vary for commercial properties. After all, larger commercial properties require more work than regular-sized residential properties.
Schedules for small offices cost about the same as you’d pay for a residential report. However, the price may increase along with the size of your property. Even so, it’s worth getting a depreciation schedule. Not only will it help you with asset deductions, but you can deduct the cost of the schedule from your taxes as well.
On Friday 14th July, the Treasury Office released a draft bill regarding how depreciation deductions on a second-hand property can be claimed moving forward. They also invited interested parties to make submissions.
It’s complicated, to say the least, so I’ve tried to simplify this Bill and the key points. Here are my 9 Key Takeaways from the Legislation;
If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.
We suspected this would be the case and I believe the property industry can collectively breathe a sigh of relief.
The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.
This is interesting and I suspect a lot more people will start buying properties in company tax structures.
If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.
How? Well, in summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.
Here is an example of how this will work:
Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets.
As they were previously used, Peter can’t claim depreciation on those items.
Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.
Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.
SUMMARY OF THE PROPOSED CHANGES
In my view, the Draft Bill could’ve been a lot worse for both the property industry and the Quantity Surveying professions.
It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.
It may, however, create a two-tier property market in relation to New and Second-hand property.
You can see the ads now “Buy Brand New – We’ve Got The Depreciation Allowances”.
It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:
Claim the building allowance (where applicable) and
Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.
The Quantity Surveying industry, just like the property development industry just breathed a huge sigh of relief.
I believe this integrity measure could’ve been better addressed and will be making a submission accordingly.
But it wasn’t a bad ‘first run’ by the Government!
P.S. If you purchased an investment property prior to The Budget, and it’s been an investment property the whole time, you are not affected and you should get a depreciation schedule quote now.
Having been in this industry for more than two decades now, I’ve met all sorts of property developers and investors. Many of the calls and inquiries I receive are from frustrated investors who could not get depreciation reports (or schedules) from their accountants or real estate agents. However, what most investors don’t know, is that there is an ethical and practical reason behind this method.
The main reason accountants and real estate agents are not qualified to create these reports boils down to one issue. Essentially, if your residential property was built after 1985 your accountant is not legally allowed to estimate the construction costs. It is important to note that the Tax Ruling 97/25, issued by the Australian Taxation Office (ATO) has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown.
Qualified Quantity Surveyors
Based on this ruling, this means accountants can offer advice around other aspects of tax depreciation. But construction costs and property depreciation are highly technical domains and must be calculated or estimated by qualified quantity surveyors in order for the report to be legally acceptable.
In nearly all cases, you will gain a larger benefit using a quantity surveyor to prepare your depreciation schedule. This is simple due to the fact that the quantity surveyor will physically visit the property. This can only be of benefit to you, the property investor, as the quantity surveyor will discover items that can only be seen from a visit to the property, and could have otherwise been missed and left out of the report.
Choosing a quantity surveyor that’s right for you doesn’t have to be challenging
To choose, buy and settle on an investment property is a lengthy process, and for good reason.
It ensures that procedures are followed and regulations are met before you are fully committed financially, and let’s face it, you’re spending a serious amount of money on something that you ultimately expect to make money on, so proper due diligence is paramount.
But what about the process you go through to purchase your tax depreciation schedule? While the cost may be a fraction of what you paid for your property, failure to obtain a thorough report is likely to cost you thousands in lost tax deductions every year.
Follow these steps to ensure you are maximising every possible cent and avoiding unnecessary interest from the tax office.
You need a Quantity Surveyor not an Accountant
If your residential property was built after 1985 your accountant is not allowed to estimate the construction costs. Neither is a real estate agent, property manager or valuer. While
accountants can offer advice around other aspects of tax depreciation, construction costs and property depreciation are highly technical domains in their own right. You need a quantity surveyor to give you a report estimating these construction costs. Also, make sure your depreciation provider is a member of the Australian Institute of Quantity Surveyors (AIQS). (You can verify this by searching for the firm at www.aiqs.com.au).
Remember, also, that your quantity surveyor must be a Registered Tax Agent.
Use an experienced Quantity Surveyor
You just paid hundreds of thousands of dollars for a property. Do you really want to save a couple of hundred tax-deductible dollars on your only tax break that can be open to interpretation and skill? Talk to your quantity surveyor about the degree of expertise they have in depreciation. How long they have been producing reports and how often do they do so? Laws have changed frequently over the years and each building is unique, so it pays to get expert advice.
Unless your property is very unusual, there would generally be no reason to speak to a quantity surveyor before purchasing a property.
While you’re hunting for potential investments, you can work out the estimated depreciation for a property by using Washington Brown’s free online depreciation calculator.
Once you have committed to purchasing the property, it is time to start thinking about contacting a quantity surveyor.
The ideal time for a QS to do an inspection is straight after settlement and just prior to the tenant moving in. This is to make sure that we don’t disturb the tenant and we also get to see exactly what you have purchased and the condition that it is in.
Why is that important?
Jenny Jones owned a unit in a complex at Hastings Parade, North Bondi. This property had substantial damage to the structure due to the surrounding elements (rain, wind, ocean spray, etc.). To fix the problem, the strata body raised a special levy of $80,000 from each of the six unit-holders and engaged a builder to carry out the work.
Once the building work was completed the strata manager engaged Washington Brown to differentiate between work that was capital in nature and work that was considered to be repairs.
In general, special levies raised are not deductible, but Washington Brown was able to break down the construction costs into repairs and capital works (i.e. eligible for building allowance depreciation). In the end, we estimated approximately $57,000 of the client’s $80,000 expenditure, or close to 80% of the overall spend, could be considered as an immediate deduction.
The client’s accountant thought this figure was too high and asked for a private ruling from the ATO.
The ATO ruling read as follows:
“The Tax Commissioner accepts the classification of the work carried out as per the report prepared by Washington Brown”.
I can proudly say that the $57,350 deduction was approved in full, as opposed to claiming the work over 40 years at 2.5%.
The Australian Institute of Quantity Surveyor’s (AIQS) website www.aiqs.com.au gives a detailed description of the major works and services of quantity surveyors. The list is quite detailed and informative, so you may find this helpful when you’re considering whether to consult a quantity surveyor.
You 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.