With the arrival of the new financial year, property investors have a prime opportunity to assess their investment strategies and make smart financial decisions. One important aspect to consider is the use of depreciation deductions, which can significantly improve the profitability of an investment. In addition to depreciation, there are several other strategies which can help property investors enhance their investment returns.
In this article, we explore how the following can help investors prepare for the new financial year:
1. Understand depreciation and the importance of claiming
Depreciation is the natural wear and tear of a property and the assets within it. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation as a yearly tax deduction.
Depreciation is claimable on a building’s structure and permanent assets, referred to as capital works deductions (Division 43). Depreciation is also claimable on the easily removable or mechanical assets, referred to as plant and equipment depreciation (Division 40).
Residential houses generate forty years of capital works deductions which are available from the construction completion date and depreciate at a rate of 2.5 per cent per year unless the property commenced construction before 26 February 1987 and after 18 July 1985, in which case the rate is 4 per cent per year.
Plant and equipment assets are depreciated over their effective life, with the rate of depreciation determined by the investor’s chosen method: diminishing value or prime cost. Investors can select the diminishing value method, which allows higher deductions earlier in the asset’s effective life, or the straight-line or prime cost method, which distributes deductions more consistently throughout the asset’s effective life.
Changes to depreciation legislation in 2017 mean owners of second-hand properties are no longer eligible to claim deductions for previously used plant and equipment assets if the property is purchased after the 9th of May 2017. This doesn’t affect brand-new properties or newly purchased assets.
By claiming depreciation, investors can reduce their taxable income, leading to an improved tax return and improved cash flow.
2. Engage a quantity surveyor
Understanding depreciation and the importance of claiming is important, however, it’s also important to engage a qualified quantity surveyor, such as BMT Tax Depreciation. Quantity surveyors are one of the few trained professionals that hold the training required to accurately calculate construction costs.
A quantity surveyor will identify all depreciable assets within a property and determine their depreciable value. Their expertise and knowledge of the latest legislation changes will ensure property investors maximise their deductions compliantly.
BMT Tax Depreciation conduct physical site inspections, so that all schedules are maximised and fully compliant. Our data from inspections show that 66 per cent of residential investment properties have had some form of renovation or addition that qualify for depreciation.
3. Evaluate property improvement opportunities
The new financial year presents an excellent opportunity for investors to assess an investment property for potential improvements. Investors should consider renovations or upgrades which could enhance the property’s value, increase rental income, or improve energy efficiency. These improvements will likely qualify for additional depreciation deductions.
It’s important to keep in mind that different improvements will generate varying deductions in both divisions. Investors should consult their quantity surveyor or accountant to determine which improvements will best meet their goal intention, whether this is to increase deductions or to complete surface-level improvements to increase rent.
4. Review investment loan structures and interest rates
Investors can take advantage of the new financial year by reviewing their investment loan structures and interest rates. Consulting a mortgage broker or financial adviser to explore opportunities for refinancing or renegotiating lower interest rates can reduce interest expenses and improve cash flow while also increasing the overall return on an investment.
Investors should consider whether restructuring an investment loan, switching to a different lender or renegotiating terms can better align them with their investment goals.
For instance, an interest only loan with offset accounts could reduce repayments while interest rates are comparatively high.
5. Seek expert financial advice
Navigating the complexities of property investment and taxation requires professional guidance. Investors should seek advice from a qualified accountant, financial adviser and quantity surveyor who specialises in property depreciation.
These professionals will provide personalised strategies tailored to an investor’s specific situation, ensuring compliance with tax laws while maximising deductions.
By taking a proactive approach, staying informed, and leveraging professional expertise, property investors can position themselves to successfully reach investment goals in the new financial year.
Property investors wanting to prepare for the new financial year by claiming maximised depreciation should get in touch with BMT on 1300 728 726 or Request a Quote.