There are many myths floating around when it comes to tax depreciation. Especially regarding what property investors are entitled to claim.
Below are some of the most common myths I have heard during my time as a qualified Quantity Surveyor.
NOTE: Information below regarding plant and equipment items may only apply to properties purchased prior to May 9, 2017 – Read about the Budget changes here).
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.
Short-stay accommodation platforms such as AirBnB can be hugely beneficial to landlords.
A recent global study found that financially you’re much better off renting your property on Airbnb than in the traditional way with a permanent tenant.
The Nested.com 2017 Real Estate Return on Investment Index found a three-bedroom property in Sydney would take 80 months to pay off through Airbnb earnings compared to 315 months via traditional rental methods – around four times as long.
This put the city at 23 in world rankings for the amount of time it takes to pay off a property via Airbnb earnings. Perth, Melbourne and Brisbane came in at 25, 43 and 57 respectively. In these cities it was also significantly quicker to pay off your home by renting it on Airbnb.
There is some conjecture about the accuracy of this data since it looked across the whole market. We know that property location is important for short-term accommodation.
But it’s undeniable there are some very attractive returns on offer through Airbnb and other short-stay websites. So, it’s no surprise that investors are increasingly jumping on the bandwagon.
The problem though is that they’re not the only ones. Some tenants are also trying to profit by subletting their rental properties, creating significant problems for landlords.
Let’s look at what’s happening
Recently, there have been a few highly publicised cases of landlords discovering their opportunistic tenants are illegally subletting their properties on Airbnb.
These tenants, dubbed ‘ghost hosts’ are breaching their leases and often building bylaws.
Last year a Victorian landlord went to the Supreme Court seeking to evict her tenants after the Victorian Civil and Administrative Tribunal (VCAT) ruled she couldn’t kick them out for subletting her St Kilda property on Airbnb.
She won the right to evict them, and the VCAT ruling was overturned. The court found the tenants had breached their lease provisions.
In Sydney, another landlord discovered her tenants were subletting her one-bedroom rental property to up to four people at a time, for triple the rent.
When she contacted Airbnb asking them to take down the listing they reportedly informed her it was a matter between herself and her tenant.
This case didn’t go to court. However, the landlord did eventually get the tenant out of their property. Only after they repeatedly ignored her requests to refrain from subletting.
While these are just a few examples, it’s becoming increasingly common for tenants to sublet their properties on Airbnb and other accommodation-sharing platforms, putting more and more landlords at risk.
A simple Google search demonstrates just how many tenants are looking to do this without their landlord’s knowledge… There’s no shortage of people talking about it or offering advice to tenants looking to sublet their rental property.
Why is it a problem for landlords?
Landlords see property investments as low risk. You find a tenant who pays rent on time and takes care of the property, minimising wear and tear. You hold the property for the long term, usually for a modest return.
Now, if your tenant starts subletting the property on an accommodation-sharing platform the scenario changes entirely, with the investment becoming high risk.
You have people – complete strangers, and large numbers of them – staying in your property that haven’t been screened. So you have no idea who they are and whether they’re taking care of the property. While there are plenty of decent people using Airbnb and the like, we’ve all heard the nightmare stories of drugs and damage to rented properties.
To add insult to injury, your tenant wants to profit from this when they don’t even own the property. It is also likely they won’t be responsible if something happens.
It’s highly likely the insurance you have as a landlord will be voided due to subletting. If something happens to the property or one of the guests, you could be the one footing the entire bill. And then there is the extra wear and tear to consider.
How can you protect yourself?
It’s always wise to screen your tenants well to begin with. Then hopefully if you select a good one, you won’t have an issue.
You’ll also need to make sure your lease clearly prohibits subleasing and that the tenant understands this.
But if you suspect your tenant might be subletting your property, you need to investigate it straight away. And more importantly, put a stop to it.
The problem is that there’s no easy way to find out if your property is being sublet. If you do find out, it’s difficult to stop it as we’ve seen in these previous examples.
To discover it you need to be vigilant. Even more so if your property is in an area that’s in high demand for short-term accommodation. Regularly checking on Airbnb and other short-stay websites to see if your property is listed is a good way to keep tabs.
Since you can’t search for an address but only look at maps on Airbnb it’s also wise to become friendly with the neighbours so they can report any unusual activity to you.
You might also find some sites online that do the checking for you. In the US there’s one called SubletAlert.com that monitors Airbnb and other websites. I haven’t found one in Australia yet, but there’s bound to be one soon.
You should also conduct regular property inspections. Even drive past your property regularly if you live in the area, and look for anything suspicious.
If you discover a problem it’s likely a tenant can only be evicted after carrying out the usual processes if they’ve breached their lease.
If your tenant has come to you asking permission to sublet the property and for some reason you’ve decided you’ll allow it (perhaps they’re making it worth your while), you’ll need to make sure you and the tenant are covered with the appropriate insurances, and the building allows it.