What are you missing out on?
The past two years’ missed depreciation deductions total $26,286
Specialist Quantity Surveyors often receive enquiries from investment property owners who have owned and rented out a property for a number of years and they have not claimed or maximised their depreciation deductions.
As many investors remain unaware of depreciation deductions, it can be quite a disappointment for them when they finally discover the thousands of dollars that may be too late to claim.
The good news for property investors is that the Australian Taxation Office (ATO) allows tax returns to be adjusted for two years after the initial submission. This enables property owners to recoup some of the deductions that may have been missed.
In the following scenario, an investor purchased an eight-year-old home for $485,000 back on the 1st of July 2011. The property was rented immediately on settlement.
At the time of settlement, the investor was not aware of the deductions available for the depreciation of the building structure and the plant and equipment assets.
When the owner became aware of the benefits of depreciation, they contacted BMT Tax Depreciation to find out how much they could claim and to arrange a tax depreciation schedule.
The table below outlines the owner’s depreciation deductions over the first four financial years of ownership.
|Total annual depreciation (DV method)
|*Owners cash return
|Able to request claim amendment
|Current financial year claim
Assumptions and Disclaimer
*The owner’s cash return in this scenario has been calculated based on a 37% tax bracket. The actual return will depend on the individual’s income tax bracket and tax circumstances. It has been assumed this investor is entitled to a return with no additional taxes owing to the ATO.
Depending on the dates that the investor lodged their prior tax returns with the ATO, it is likely that they can request an amendment of their income tax assessment for the 2012-2013 and 2013-2014 financial years. At the time of contacting BMT, the property owner had missed claims for substantial deductions during the first three years of ownership.
The investor may be unable to claim depreciation deductions for the 2011-2012 financial year. The deductions missed during this period total $14,819, which would have represented a $5,483 reduction to the investor’s income tax payable for the 2011-2012 financial year.
By lodging a request for the two previous income tax returns to be adjusted, this investor can claim $13,202 and $13,084 in depreciation deductions respectively (assuming they select the diminishing value method). This could represent a cash benefit of $4,855 and $4,841 for each respective financial year.
It’s important to note that a separate application will need to be submitted for each financial year requiring an amendment. Income, depreciation and other claims made will impact the outcome of each tax return. By claiming depreciation the owner is reducing their tax payable and the costs of holding the property.
In special circumstances (for example, the investor may have been living overseas) the ATO may allow investors to go back further and amend additional years claims.
When BMT prepares a depreciation schedule, the value of all plant and equipment items within the property will be estimated from the settlement date and historical construction costs will be estimated whenever actual costs are not available. Information on what an investor can claim from settlement onwards will be outlined in the depreciation schedule.
When an investor has missed or not maximised their claim in previous years, the depreciation schedule can be tailored within the eligible years. For example, low-value pooling of assets can be delayed when applying the diminishing value method.
An Accountant should be consulted to request an income tax return amendment. They will use information outlined within a tax depreciation schedule to ascertain which financial years an investor can lodge a variation request for and make an additional claim for years missed.