What is a depreciation report?
If you’re wondering what a depreciation report is, and why everyone in the property investment industry is talking about it, now would be the perfect time for you to dive in the topic. Since Australia has entered the next phase of the property cycle, depreciation reports are now more relevant and vital than ever.
This year the Australian property market, and thus the investment opportunities connected to it, are experiencing a significant shift. The Australian Prudential Regulation Authority’s macro-prudential measures restricting lending to investors played a major part in the “change of heart” of the royal banking commission. That in return made banks allergic to risk, leaving property investors with tightened criteria for the availability of credit.
This situation motivated investors to seek other, more creative solutions regarding asset management. Some of the methods include cost reductions and tax deductions, which is where depreciation reports come in handy.
A Washington Brown depreciation report will outline the wear and tear on your income-earning property, which is classified as a form of tax deduction.In Australia, the depreciation report must be up-to-date with the ATO (Australian Taxation Office) provisions and changes that apply to:
- small and large businesses
- rental property investors
- employees – for equipment and tools they provide at their own expense for use in their work.
Washington Brown prepares the depreciation reports according to the TaxMax500™ covering over 500 variables that will leave no stone unturned, and all according to the latest ATO revisions. Each of these costs is precisely calculated and included in the depreciation report for the investor.
While we are on the subject of ATO, there are two types of allowances regarding depreciation:
- Plant and Equipment – which are items that can be found within the building, like ovens, air conditioners or carpets
- Building Allowance – which are constructions costs of the building itself, for example, concrete and brickwork.
Please note – you can only claim Plant & Equipment on brand new properties now, but in every depreciation report you will be able to claim the Building Allowance.
Why do you need one?
As an investor, you need a property depreciation report because it reduces your taxable income. Plain and simple. The report is focused only on the depreciating assets.
For further clarification, according to ATO, the definition of the term, depreciating asset, is “one that has a limited effective life and can reasonably be expected to decline in value over the time it’s used. Land, trading stock and some intangible assets are not depreciating assets.”
What is the process of getting a report?
However, the process itself is not as simple as it looks, only the end result for the client is. Let’s explain how it works. You can claim most of the depreciation based upon the original construction cost of a property. Since you can’t just estimate the construction cost claims by yourself, you’re going to need a qualified quantity surveyor to do that for you. As a professional, he or she, will inspect the property and create a bespoke property depreciation schedule. According to the ATO rules, which we mentioned above, the construction cost (the basis for the write-down) can only be estimated by Quantity Surveyor.
What are the benefits of a property depreciation report prepared by Washington Brown experts?
- The report is valid for 40 years
- All previous renovations and acquisition improvements are factored in the report
- Joint ownership reports and split reports regarding each of the owners are prepared when applicable
- Furniture package acquisitions are included per standard
- Time lived in the property is also included and factored in the report
- Operative life calculation adjustments in the plant and equipment sector of the report
- All calculations start from the specific settlement date, not from the first financial year report admitted to ATO
- Through property inspection from our qualified quantity surveyors
What information does a the report contain?
Wanting to “get your money’s worth” is only natural, which is why we’re going to share the basic information you will be getting in the building depreciation report.
- A breakdown of the applicable capital works items that can be claimed.
- A financial analysis of the plant and equipment included within the property and whether you can now claim those items.
- A breakdown of any items you have included within the property itself.
All of the above will enable us to create a high-quality, detailed, per ATO requirements depreciation report that will save you money.
How important is a depreciation report for investment property?
The depreciation report for investment property is useful because you as an investor can maximise the return from your property each financial year. The most sensible method to approach this is to hire professionals who will take into consideration each cost from the settlement date. You would want an expert that can factor in the diminishing value or prime cost methods of depreciation, depending on the type of property and other relevant factors.
It’s always recommended for property investors to consult with qualified quantity surveyor that has a systematic knowledge of the current tax depreciation rules and the capital deductions legislation. Especially, before you submit the tax return with ATO.
A depreciation report can be a powerful tool for cost reductions, because as we said above, it will reduce your taxable income. It’s a prudent way to save money by calculating the depreciation tax reduction in your investment plan.
How much does a depreciation report cost?
Pricing can vary depending on whether you need a depreciation report for a house or commercial property. Generally speaking, for a residential depreciation report you will pay between $330 and $715 including GST.
Not all depreciation reports are the same, but make sure you find out whether the depreciation report needs an inspection or not.
The laws have changed and Washington Brown will advise you on the best plan and cost for your depreciation report.
Some companies advise that all properties need an inspection – that is not the case anymore.
So find out how much a depreciation report costs by clicking the link below.