Property depreciation is one of the largest tax deductions for homeowners in Australia. But did you know that you can backdate your property’s depreciation? Doing so could save you thousands of dollars every year.
As an investor, you need to take advantage of all the tax deductions Australia has to offer. Property depreciation deductions allow you to control your cash flow from your property. As a result, you can use them to enhance your property’s profitability.
Many who own an investment property in Australia claim depreciation yearly.
Unfortunately, some overlook these deductions entirely. Happily, you can backdate your depreciation claims. Firstly, let’s look at what property depreciation means.
You can claim for any loss of value resulting from the wear and tear of the property as it ages. Capital works are the building’s structural elements, and you can claim for all of them, including the roof tiles and the concrete used throughout the building.
You can also claim for the wear and tear of any equipment in the property. This includes things like the property’s fixtures, but extends to things like carpets and ceiling fans. (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).
Claiming for your property’s depreciation is one of the most effective tax deductions in Australia. It allows you to reduce your yearly taxable income, which means your tax bill also decreases. When used correctly, depreciation allows you to take home more money each year.
Behind the deductions you claim for interest expenses, depreciation is one of the largest tax deductions in Australia. However, many investors fail to claim for all their property depreciation. Some even forget about it entirely, which could result in the loss of thousands of dollars over the lifetime of your investment.
Using Backdating to Claim Depreciation
So, what can you do if you haven’t claimed for all of the depreciation you’re entitled to? This is where backdating can help you.
There are two key steps you must take to backdate depreciation properly:
Work with a Quantity Surveyor to create a full depreciation schedule for your property. Your surveyor will inform you about every item you can make a claim for. They will also discuss rental property depreciation rates with you.
Bring the surveyor’s depreciation schedule to your accountant. He or she will alter your tax returns so that you claim for all of the depreciation you’re entitled to.
In most cases, you can only backdate depreciation for two years.
What is a Tax Depreciation Schedule?
If you’ve never claimed for your property’s depreciation, you may not know what a tax depreciation schedule is.
The schedule your Quantity Surveyor creates, offers a summary of every item in your property that depreciates in value. Think of it as an investment property tax deductions calculator focused solely on depreciation. The schedule notes every item, and informs you of how much you can claim for each over the course of the next 40 years.
As noted, your accountant can use this schedule to backdate your tax returns for the previous two years. However, they will also use it to help them to complete your future tax returns. This ensures you claim properly for all future depreciation of your property’s capital works and equipment.
Can I Backdate for More Than Two Years?
In most cases, you can’t backdate your tax returns for over two years. The Australian Taxation Office (ATO) has strict guidelines in place. These usually prevent you from exceeding the two-year limit.
However, that isn’t to say it is impossible. The ATO has different rules for companies than it does for individual investors. There are also different rules for those using a self-managed superannuation fund (SMSF), or a trust.
As a result, it’s worth speaking to your accountant to find out if your situation allows you to backdate for more than two years. It’s unlikely, but you may strike it lucky and be able to claim for even more depreciation than you expected.
Is Backdating Worth It?
Yes, it is. If you don’t account for your investment property depreciation, you could lose out on thousands of dollars every year. In fact, claiming for depreciation can turn a negatively geared property into a positive one.
On top of that, you can also claim the cost of your Quantity Surveyor as a tax deduction.
The Final Word
That’s everything you need to know about backdating depreciation. Speak to your accountant today to find out how far you can backdate your claims.
Washington Brown is here to help if you need a quality Quantity Surveyor. Contact us today to get a full depreciation schedule for your investment property.
You see, when you buy an investment property part of the purchase price includes things such as carpet, ovens, blinds and other loose items.
The Australian Taxation Office (ATO) determines how long these types of items will last for. This determination then governs how much you are able to claim annually.
Simply put, if the carpet in your brand new house has an effective life of ten years and has a value of $1,000, you can claim $100 per year over a ten year period. Simple right?
But what happens when you acquire carpet that is seven years old?
Well, you (or a qualified quantity surveyor) can reassess the life of the carpet and assign a new effective life.
For instance, if the carpet is seven years old, you can say the carpet is only going to last for three more years. So now you can claim the remaining value at a rate of 33.3% per annum for the next three years to equal the same deductions you would have received over the ten years.
Effective life deductions can make a huge difference to the annual amount you as a property investor can claim!
As an expert in the market I am baffled by the number of companies that offer do-it-yourself depreciation schedules. Not only are there some potential legal issues but, more importantly, you will be missing out on deductions.
The Issue with DIY Depreciation
The DIY depreciation option generally gives you a tick sheet and asks you to take your own measurements of rooms and other parts of the property.
Now, let’s say you measure from one bedroom wall to the other. If you do that all around the house you could reduce the property by 10% in gross area. At around $1,500 per square metre to build, you would have missed out on something like $15,000 worth of tax deductions.
When a client comes to us needing a depreciation report, we typically use the actual construction costs collected from over 40 years of working on Australian development projects, or we work from accurate plans and/or a quantity surveyor’s inspection. This involves a measurement of all the rooms and areas in the property (allowing for wall widths and other anomalies) and all the plant and equipment items including carpets, blinds, ovens and air conditioners.
It is a thorough process and you should use technically qualified people to do it.
The AIQS also points out that those property owners who attempt to estimate their own depreciation, or use non quantity surveying qualified people, risk submitting an incomplete or poor depreciation report, which could be a double whammy. It could not only cost them in missed deductions but could also possibly attract an audit by the ATO if their report is not up to the standard required.
To help property investors maximise their tax returns and get their fair share of the tens of billions in tax refunds handed back each year we’ve put together the following tips:
Maximising Your Tax Return:
The easiest way to maximise your tax refund 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:
Interest on an investment loan
Holding costs, including council/water rates and body corporate bills
Tenancy costs, including property management fees and the cost of advertising for a tenant
Insurance premiums, such as landlord insurance
Legal costs for troublesome tenants
Travelling costs for property inspections
Repairs and maintenance caused by tenant wear and tear
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. Mostly 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. As income-producing assets can be claimed as a tax deduction.
There are two types of depreciation allowances for investment properties – plant and equipment, which covers removable items such as dishwashers, and 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.
Depreciation is one of the key ways to maximise your tax refund. 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.
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.
Consider 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 your 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, so you’ll 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 alone 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 each and 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.
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