You Can Claim Tax Deductions in Australia for Previous Renovations
When considering tax deductions in Australia, most investors only take their own renovations into account. It does make sense. After all, why should you be eligible to claim deductions on your investment property in Australia if you didn’t pay for the work?
Perhaps surprisingly, you can claim deductions for the previous owner’s renovations. However, there are several things you need to consider. For example, how much you can claim depends on when you purchased the property. The effects of the 2017 Budget play a role here, as what you can claim differs depending on if you made your purchase before or after the budget. Let’s look at what tax deductions in Australia you can claim in both scenarios.
You Bought Before the 2017 Budget
Things are simpler if you bought the property before the 2017 Budget. If this is the case, you can make claims under both Division 43 and Division 40 of the Income Tax Assessment Act (ITAA).
Division 43 relates to any capital works that the previous owner undertook on the property. This includes any renovations, such as the building of some extensions or remodelling a bathroom or kitchen. It also covers any work done to the building’s structure. For example, you’d be able to claim for a new roof or for some of the walls that the previous owner built.
Division 40 relates to the equipment installed in the property. Your investment property in Australia may have an air conditioning unit or some other piece of equipment that the previous owner installed. If that’s the case, you should be able to claim for it.
The only real barrier is that you may not know the completion date for the work or the cost. Not all sellers will provide you with this information. If that’s the case, you need to employ the services of a quantity surveyor. Your surveyor will provide you with a cost estimate, which you can use when claiming tax deductions in Australia. The Australian Taxation Office (ATO) does not accept estimates from other professionals. For example, you can’t get an estimate from your accountant for the work. It has to come from a quantity surveyor.
You Bought After the 2017 Budget
This is where things get more complicated. You have to consider the extent of the renovation work, as well as whether any was carried out in the first place.
The new budget introduced the term “new residential premises” into the equation. To understand what this phrase means, we need to look at the Goods and Services Tax (GST) Act.
What Does the GST Act Say
You’ll find references to “new residential premises” in sections 40 to 75 in the GST Act. Generally, such a premises is one that has not been rented out or sold as a residential home before your purchase. This won’t usually present a problem. After all, that language basically covers new properties.
However, there’s more. The Act also defines these premises as those that have undergone “substantial renovation” work. The GST Act also provides a description for “substantial renovations”. They are any renovations through which the entire building has either been replaced or removed. As a result, the installation of a new bathroom is not considered as a substantial renovation on its own.
What Does This Mean for Me?
If your investment property in Australia does not fall into the substantial renovations category, you may not be able to claim the same deductions that you could on a property built before the 2017 Budget. In particular, you won’t be able to claim Division 40 depreciation. New equipment on its own is not enough to constitute a substantial renovation.
However, this changes if the building has undergone enough renovation to become a “new residential premises”. In such cases, you can claim for both Division 43 and Division 40 work.
You’ll need the help of a quantity surveyor to work out the extent of the work undertaken on your building. Your surveyor will create a timeline for the building. This will estimate the work carried out, its cost and its extent. You can use this information to figure out if your building falls into the “new residential premises” category.
Don’t fret if it doesn’t. You can still claim for Division 43 work. Your quantity surveyor will be able to provide more exact information detailing exactly what you can claim for.
You’ll need the services of a quantity surveyor, regardless of when your property was built. They will be able to tell you what previous renovations you can claim for.
We can help you if you’re looking for a quantity surveyor. Contact us today to maximise the depreciation on your property’s previous owner’s renovations.
Whenever I am delivering a presentation or conducting a webinar, I always make sure to leave time for a 30 min Q&A session at the end.
In most Q&A sessions, the topic that by-far receives the most queries has to do with the concept of “scrapping” in relation to property tax depreciation.
Claiming the Residual Value on items that are about to removed can significantly increase your tax depreciation deductions. The problem is that many investors who renovate miss out on this due to a lack of awareness.
It’s important to understand the basics of property depreciation before diving into the subject of scrapping so, let’s have a quick re-cap into what property depreciation is all about.
What is Property Depreciation?
Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.
There are two types of depreciation allowances available: depreciation on Plant and Equipment Assets and the Capital Works deductions.
- Depreciating Plant and Equipment Assets (Division 40) refers to items within the building like ovens, dishwashers, carpet & blinds etc.
- (NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – They’re values, however, can still be scrapped in full if removed or sold- Read about the Budget changes here).
- Capital Works deductions (Division 43) refers to construction costs of the building itself, such as concrete and brickwork.
Whilst both of these costs can be offset against your assessable income, the property must be used for income-generating purposes. It is also important to note that to be eligible to claim on the Capital Works component, a residential property needs to have been built after the 18th of July 1985.
So what is scrapping and why is it a hot topic for property investors?
Put simply, scrapping is the ability to claim deductions on items within your investment property that you are about to throw away.
Engaging a qualified Quantity Surveying firm will ensure that you do not miss out on claiming any eligible residual value of these items as a depreciation deduction. This value can be claimed immediately in whole, once the items have been removed.
The reason it’s such a hot topic is due to the fact that these deductions can often add up to thousands of dollars.
There is one major caveat though. In order to claim the residual value on these items, your rental property must be producing an assessable income prior to the disposal.
There is no clear guideline on how long the property needs to be rented out for though, just that is was producing an assessable income.
There are two ways we can assess the scrapping allowances of an investment property.
Option 1 – Only depreciable assets can be scrapped
(This means the building was built before 1985 and no residual capital works deductions are available)
For Division 40 depreciable assets, if a taxpayer ceases to hold a depreciating asset (sold or destroyed) or ceases to use a depreciating asset (doesn’t need it anymore) a “balancing adjustment” will occur.
You work out the balancing adjustment amount by comparing the asset’s termination value (sales proceeds) and its adjustable value.
If the termination value is greater, you include the excess in your assessable income but if the termination value is less, you deduct the difference.
These deductions can add up quickly. Even if only in relation to depreciable assets.
Let’s crunch some numbers:
Joan Smith settles on a property for $650,000 on Oct 15 2015, the property had a long term tenant in place, who had agreed to stay for another 6 months. The property was 19.5 years old when she settled on it.
Washington Brown inspected the property on Oct 15 2015 and assigned the following values to the depreciable assets listed
Oven $ 625, Carpets $ 1536, Blinds $ 885, Range Hood $ 475 & Dishwasher $ 558
Joan decides, voluntarily, to upgrade the apartment so that she can attract a higher quality tenant. At the end of the lease, when the tenant moved out, Joan replaced the items above.
Joan can claim the full depreciable amount of $4079 in her 2015/2016 tax return for these items that she is removing.
In addition, Joan has spent $8,555 replacing the items above, she can now start to claim these new items based upon their individual depreciation rate.
Option 2 – Depreciable Assets and & Capital Works deduction can be scrapped.
If you start moving walls or replacing kitchens in buildings built after 1987: your claim has the potential to be huge!
And let’s face it, it’s not that unusual to want to update a 20 year old kitchen.
Now let’s crunch the numbers on a situation where Joan renovated the kitchen and bathroom as well:
|Capital Work item
||Cost in 1995
||Residual Value in 2015
|Plumbing Bathroom & Kitchen
|Electrical Bathroom & Kitchen
|Tiling Kitchen & Bathroom
The items above have been depreciated at 2.5% per annum for 20 years. That equates to 50% left of the value that can be claimed as an immediate deduction when removed in 2016.
That’s the tidy sum of $15,816.00 as an immediate tax depreciation deduction!
One thing that needs to be considered when calculating the amount of deductions available, is whether you or another person was not allowed a deduction for capital works.
“It’s complicated” but here the method statement from the Income Tax Assessment ACT:
The amount of the balancing deduction
Step 1. Calculate the amount (if any) by which the * undeducted construction expenditure for the part of * your area that was destroyed exceeds the amounts you have received or have a right to receive for the destruction of that part.
Step 2. Reduce the amount at Step 1 if one or more of these happened to that part of * your area:
(a) Step 2 or 4 in section 43- 210, or Step 2 or 3 in section 43- 215, applied to you or another person for it;
(b) you were, or another person was, not allowed a deduction for it under this Division;
(c) a deduction for it was not allowed or was reduced (for you or another person) under former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 .
The reduction under this step must be reasonable.”
So in simple terms, you need to take into account any periods where Capital Works deductions could not be claimed and reduce that amount from any residual value left.
The last line is interesting, “The reduction under this step must be reasonable”.
I say interesting, because there are so many variables and not a lot of rulings to go by. But in my opinions here are some reasonable examples:
- It would be reasonable to assume that if you purchased an industrial or commercial property, Capital Works deductions were available the whole time. So no allowance for non use would be required.
- It would be reasonable to assume that if you purchased a serviced apartment, Capital Works deductions were available the whole time. So no allowance for non use would be required.
- It would be reasonable to assume that if you purchased a unit in a ski resort, it was used, perhaps, for 2 weeks of the year for private use by the previous owner and you would need to factor that in.
- It would be reasonable to assume that if you purchased a holiday house, in area where holiday lettings are common and that you saw the property listed on AIRBNB prior to your purchase and the holiday period was blocked out – then you should factor 2 weeks of private use per year into the equation.
- Now the tricky one, you buy an average unit with a tenant in place. Who knows, it may have changed 5 times since it was new. I think it would be unreasonable for you to have to find out the full history of the unit. Privacy laws are very strict now, particularly in Victoria. So in that case, I would personally assume it was an investment property the whole time – but that’s me!!
One final thing you need to factor in, just to make life more complicated, is whether any amounts were received by way of insurance.
The termination value or residual value needs to include the amount received under an insurance policy.
So, if it is insured, there is often nothing to deduct when the asset is lost or destroyed.
As you have probably gathered by now, claiming the residual value on depreciating assets and capital works deductions “is complicated”.
I would recommend speaking with your accountant or financial advisor prior to engaging a Quantity Surveyor to carry out a scrapping schedule. If you are going to proceed with this type of report, it is advantageous to have the quantity surveyor visit the property prior to you starting renovations.
Washington Brown has crunched the numbers on The Block’s latest development in Melbourne’s inner-city bayside suburb of Port Melbourne, and something just doesn’t add up.
From a financial point of view the development, which consisted of transforming a 1920s art deco building into a luxury apartment block, was one of the worst he has ever seen.
While I understand the magic of television, Channel 9 has outdone David Copperfield in creating the illusion of a profit to the public!
Let’s look at the numbers:
According to reports Channel 9 bought the site for around $5 million, which allowed for 6 apartments. Only 5 were sold on TV and for calculation purposes let’s say the acquisition costs is $4.2 million.
The construction cost and depreciation allowances totalled over $11 million, for the 5 apartments alone.
That’s $15.2 million alone in construction and acquisition costs.
It’s worth noting that under the Income Tax Assessment Act 1997 the initial vendor (ie. the developer) has an obligation to pass on the actual costs of construction to the purchaser, where the costs are known.
Let’s not forget there’s then a variety of other costs involved in buying and selling, and undertaking a property development, including:
- Stamp duty
- GST on the sale
- Agents’ fees
- Legal fees
Whilst some of these costs may have been avoided due to contra deals, the bulk would have to be outlaid by Channel 9.
I estimate these additional costs to conservatively be $2 million, which brings the total cost to $17.2 million.
The Block’s total sales realised just a little over $12 million, leaving the development in the red by around $5 million, yet it has been indicated that profits of up to $715,000 were made by the contestants.
That something David Copperfield would be in awe of.
You know it’s the peak of the market when reality TV shows are pulling rabbits out of a hat to show a profit.
Whilst the contestants may have walked away with some ‘profit’, if the numbers are to be believed as shown on the show that development was a stinker.
The worry is these shows give an unrealistic expectation to would be budding renovators.
While a property investor’s major goal is likely to be capital growth, they’ll also be looking for solid rental yields to help them hold onto their asset.
To achieve the best possible rental return, you’ll need to maximise the appeal of your property to potential tenants. But what do tenants want? Generally they’ll want a home in a good location, close to employment, amenity and public transport. These are all things you should consider when you’re buying.
But you should also drill down to who the tenants in the particular area are, and what they desire from the property itself. How many bedrooms and bathrooms do they want? Would they like an outdoor area? Will they value nice window coverings?
If you already own a property there are several things you can do to increase the weekly rent and maximise your rental yield. Many of these are simple enhancements that won’t require a huge outlay of funds.
It’s often better to focus on increasing your income rather than cutting back on expenses by, for example, being lax in your maintenance of the property. Keeping your tenants happy will pay off in the long run, as you’ll likely have fewer vacancies and your tenants will be more willing to pay a higher rent.
While you can also consider self-managing to cut back on costs, this can backfire if it’s not done properly, costing you even more out of your own pocket.
So what can you do to increase your income? We’ve put together the below list to give you some rental yield tips. Just remember, whatever you do will depend upon what your tenants want – and are willing to pay more for.
And don’t forget to maximise your deductions for depreciation, which can further boost your rental yield.
Make your rental property pet-friendly
Australia has one of the highest pet ownership rates in the world. More than half the Australian population own an animal.
The reality is, however, that it can be difficult for tenants to find properties that a) allow pets and b) are suitable for pets. So it makes sense that if you allow pets in your property you’ll not only widen the potential rental pool, but you’ll also be able to command a higher rental rate. Some property managers estimate you could charge an extra $20 or $30 a week if you allow pets.
While pets can cause damage there are ways you can mitigate any potential problems. Such as having a relevant clause in the rental contract, having a vigilant property manager to regularly inspect the property, and covering yourself with appropriate insurance.
Provide modern technology
Ensure your property is well and truly in the 21st century by providing up-to date technology that every tenant expects – and demands – in a home now.
This includes having a strong internet connection, a strong mobile phone signal, adequate power points and even the ability to install pay TV.
Ceiling fans may be adequate in some circumstances, but most tenants dealing with an Australian summer will want air conditioning. Nowadays, most will be willing to pay a premium for it.
Heating can be just as important as cooling. Make sure you get a reverse-cycle air conditioner if you’re installing one and put it in the areas where it will have the greatest impact.
Providing your tenants with added extras that make your property more comfortable to live in, such as a dishwasher, washing machine, dryer, clothesline or even flyscreens, can lead to an increase in rent.
Remember you’ll be responsible for maintaining and repairing any appliances, so only install something that you’re sure will be beneficial.
While this will require an outlay of funds at the beginning, it could pay off in the end with a boost in your rental income and yield.
Whether or not this works, however, will depend on the market in which you’re renting your property. It’s usually best suited to inner-city areas. So, while it won’t be for everyone, it can work very well for short-term renters, such as executive rentals or student accommodation.
If you furnish your property well, with modern furniture, it can add hundreds of dollars per week to the rent.
You don’t need to go overboard with high-tech alarms or CCTV, but make sure your property is safe and secure, with doors and windows that lock properly.
Consider adding security screens, or if you want to go a step further you could invest in swipe card security measures. Privacy is also key.
Add some off-street parking
Public transport infrastructure is improving in many places, but people still like to drive their cars.
Your property should have at least one parking space, and if you have a second – even in the form of a shade-sail carport – it will be more in demand.
Having off-street parking in inner city areas will command the greatest premium, as this is where it’s most limited.
Creating an extra storage space can lead to higher demand for your property and higher rents.
Built-in wardrobes are very important, but renters may also like an outdoor shed or a cupboard under the stairs. Creating storage is fairly easy to do and will likely require only a small outlay of capital.
Presentation is important, so undertaking renovations can be a great way to improve your yield.
If your budget is small you can just do some minor cosmetic work such as painting or changing floor coverings, or even fixtures and fittings in the bathroom and kitchen.
You can, of course, also do more major renovations. Such as a complete overhaul of rooms, or even adding a bathroom, bedroom or an internal laundry.
Many tenants will also pay more for an outdoor space where they can entertain. You could also consider adding a veranda or deck, but this will come at a hefty cost.
Just make sure you’ve done the calculations and you know you’ll be getting your money’s worth by not only attracting more tenants, but by adequately increasing the rent.
Perhaps surprisingly, there are plenty of landlords renting their properties below market. If you’re not charging market rent, raise it, and review it regularly. A good property manager can help with this.
Adding a second dwelling, such as a granny flat, that can be rented separately can increase your rental income.
This will only suitable in areas that allow it of course and it can come with its own complications, as it may be harder to find tenants, and rent on the main house can also decrease.
This can lead to a decrease in a tenant’s electricity bills, and consequently they might be willing to pay more rent. The installation costs are significant, however, adding up to $3000 or $4000, so you’ll need to ensure you can recoup this – and more – in increased rent.
Consider arrangements outside of a long-term lease
Renting the property by the room can maximise your rental return, as can holiday letting or doing short-term leases.
Beware of the possible drawbacks though, as there can be higher vacancies and more wear and tear; any rental increase will need to make up for this.
Claiming depreciation is one of the most important steps in an investor’s journey. Here’s my Top 5 Tax Depreciation tips to maximise the return on your investment property.
Number 1: Use an Experienced Quantity Surveyor
You’ve just paid hundreds of thousands of dollars for a property. Do you really want to risk missing out on tens of thousands of dollars in deductions just to save a couple of hundred tax deductible dollars on the ONLY tax break available to you that can be open to interpretation and skill?
The ATO has identified quantity surveyors such as Washington Brown as appropriately qualified to estimate the original construction costs in cases where that figure is unknown. The laws have also changed frequently over the years and each building is unique, so it pays to get expert advice. The ATO requires all companies who prepare Tax Depreciation Schedules to be registered Tax Agents.
Number 2: Claiming the Residual Value Write Off
I believe millions of dollars will be missed over the coming years in tax depreciation claims due to changes in what can be defined as ‘plant and equipment’.
If you are renovating a kitchen or bathroom in a property built after 1985 – get a quantity surveyor in before you demolish so they can assess what the residual value of the existing items are. This residual value can be claimed as an outright deduction and can generate huge savings in the first year (The plant and equipment component of this may now be considered a capital loss rather than deduction from your personal income taxes due to recent Budget changes).
For instance, a rental property with a 20 year-old kitchen could possibly attract an immediate deduction of around $5,000 if removed.
The added bonus is that you get to claim depreciation on the new work once it is complete too!
Number 3: Small Items and Low Value Pooling
A dollar today is worth more than a dollar tomorrow so deduct items as quickly as possible.
Individual items under $300 can be written off immediately. An important thing to remember here is that provided your portion is under $300 you can still write it off.
For instance, say an electric motor to the garage door cost an apartment block $2000. If there are 50 units in the block, your portion is $40. You can claim that $40 outright – as your portion is under $300. You can also try to buy items that depreciate faster such as purchasing a microwave that costs $295 as opposed to one that costs $320.
Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate. So for instance, a $1200 television attracts a 20% deduction whilst a $950 television deducts at 37.5% per annum.
Number 4: Old Properties Depreciate too
Even properties built before 1985 (when the building allowance kicked in) are worth depreciating.
The purchase price of your property includes the Land, Building and the Plant and Equipment. As a quantity surveyor we help you apportion or break down the purchase price into those categories.
In about 99% of cases we find enough plant and equipment items to justify the expense of engaging our firm (for ‘Pre-Budget’ properties). At Washington Brown we guarantee to save you twice the fee of engagement or your report will be free!
Number 5: Use the Washington Brown Tax Depreciation Calculator
The saying goes “if only I knew then what I know now!” When it comes to depreciation, you can. Investors can use our website, free of charge, and get an instant estimate of the likely tax depreciation deductions on a property before they buy it.
This calculator uses real life data collated from every inspection we do on behalf of our clients. So the data gets more accurate with time.
For more information on depreciation or to discuss your specific investment property, call us on 1300 990 612 or email email@example.com. Tyron Hyde is a director of Washington Brown – The Property Depreciation Experts. He has a degree in construction economics and is an associate of the Australian Institute of Quantity Surveyors.
CLAIM IT! – Wall Street has been for years!
Well, to be honest, I actually wanted to be an architect – but didn’t get the marks.
My brother-in-law, who was a property developer, saw that I liked construction and that I was good at maths so suggested that Quantity Surveying might be a good fit.
The year was 1989 and off I went to UTS for a couple of years.
But, for those of you too old to remember the late 80’s, interest rates were at 17% and property development ground to a halt.
So like many other hordes of Aussies I thought I’d see the world and went backpacking through Europe.
On this journey I quickly learnt that working for the minimum wage was not the future I aspired too.
One day while walking to a fairly crappy part time job on a dark winter’s day in London, I calculated that the cost of travel, a packet of cigarettes (I’m an ex-smoker – one of those annoying ones) and a can of coke was equivalent to my daily take home pay and right there and then I decided it was time to come home.
I was 22 and thought I was TOO OLD to get into the property industry. (Now I get CV’s from 22 year olds and think they are kids!)
But I did go back to Uni.
And about halfway through the year I saw some ads around Uni call for a “Cadet Quantity Surveyor for Washington Brown”.
Wow, I thought that sounds like a big company.
So I ran around campus and ripped down all the flyers that had been spread throughout the Uni.
Surprisingly I was the only one that turned up for the job.
More surprisingly was that Washington Brown wasn’t a big company – It was a one man band run by Mr. Antony Brown.
I was desperate to get into the industry – so I offered to work for a year for free.
Which I did and can now say proudly that I own the company and we are far from a one man band!
That’s my story – What’s yours? I’d love to hear in the space below.
“I’m having a Rant” N.B. this is not me – he does it far better
Many, many moons ago all Quantity Surveyors interpreted the Tax Act differently when preparing depreciation reports.
For example, some of us would say that kitchens were part of the building and others considered them to be Plant & Equipment (P&E).
Generally speaking it’s better to have an item considered P&E because you can claim it at an accelerated rate of depreciation.
(UPDATE: Deductions for plant and equipment items may only apply to commercial properties, brand new properties, if you bought the property prior to May 9, 2017, or some other exceptions – Read about the Budget changes here).
The ATO saw the discrepancies and finally published a definitive list that we could all use.
The rant starts now- How the ATO went too far:
The ATO went too far! You see, they classified items such as kitchen cupboards, shower screens, vanity cupboards and many other items into the building allowance which means they have to be claimed over 40 years.
I don’t know about you – but I don’t want a shower surrounded by a 39 year-old shower screen, do you? Eeeww.
I see more & more properties that are 20 years old and have needed a serious makeover in order to get a tenant.
TIP: Don’t let the ATO get away with it – if you do remove things from your property consider a Scrapping Schedule.
If you do need a quote for a depreciation schedule, please click here.
Keeping records for tax purposes
We all know that when it comes to maximising your tax deductions, keeping records is very important. Without them, you leave yourself exposed and vulnerable in the event of an audit by the Australian Taxation Office (ATO).
The ATO relies on individuals to be responsible for assessing which items can be declared and claimed when it comes to calculating their own taxable income. However, it is crucial that one is able to provide evidence and proof of how these figures were compiled.
When it comes to claiming deductions and maximising the depreciation benefits associated with your investment property, it is necessary to supply a record of each individual expense. In accordance with ATO requirements, all records relating to rental property expenses must be easily legible and must contain the following information: name of supplier, amount of the expense, nature of the goods or services, date when the expense was incurred, and the date of the document.
This is particularly relevant when renovations are being carried out. There may be instances where a document does not indicate the date of payment. In this case, you may use other supporting but independent evidence, like a bank statement which shows the date when the expense was incurred.
Ultimately, keeping accurate and complete records means that your tax submission will stand up to scrutiny from the ATO and ensures that you achieve the best possible financial outcome. In the case where records are not able to be provided – for legitimate reasons – an estimate by a Quantity Surveyor will be accepted by the ATO.
If you haven’t got the construction and need a quote for a depreciation schedule – click here or use our free online depreciation calculator to estimate your tax deductions today!