With the end of financial year fast approaching, now is the time to get your tax depreciation schedule sorted if you haven’t already.
There are significant advantages to ordering a depreciation schedule immediatley after purchase that can help you to maximise your return and make the most of your investment.
Before we look at those advantages, let’s recap what depreciation is and how it assists property investors.
The Australian Taxation Office (ATO) allows property owners to claim the depreciation, or decline in value of an asset, as a tax deduction.
Depreciation is a non-cash deduction, meaning an investor doesn’t need to spend any money to claim it. For this reason, depreciation deductions are often overlooked. This is a costly mistake for investors, as depreciation deductions carry significant taxation benefits.
With tax time approaching, property owners should be sure they are claiming all the deductions to which they are entitled.
Owners of income-producing properties can claim depreciation deductions related to the building’s structure as well as the plant and equipment assets within the property.
It’s important to organise a depreciation schedule before the end of the financial year to maximise your deductions and claim everything you’re eligible for from the year.
Failing to claim depreciation means missing out on thousands of dollars. In FY2021/2022 to-date, BMT found investors an average first year deduction of almost $9,000. Meanwhile, the most up-to-date numbers show that the Australian Taxation Office (ATO) saw property investors claim approximately $4,000 on average in depreciation deductions.
Claim the cost of your schedule straight away
A depreciation schedule has a one-off cost which lasts the life of the property (forty years) and will ensure the owner claims their depreciation entitlements correctly.
The cost of the depreciation schedule is 100 per cent tax deductible.
One of the advantages to ordering and paying for a depreciation schedule before 30 June is that an investor will be able to claim the fee straight back that financial year.
This not only means less time out of pocket, but it eliminates the risk of forgetting to claim the depreciation schedule’s fee as a tax deduction in the following financial year.
Partial year claims
If a property has been owned and rented for only a short period, investors often postpone obtaining a tax depreciation schedule until the next year. However, there are ways in which partial year deductions can be maximised, resulting in extra cash for the owner.
Usually, the total depreciation available in the first financial year is adjusted according to the portion of the year the property is owned. For example, if a property is owned for six months, then 50 per cent of the depreciation could become available. However, specialist quantity surveyors can use legislative tools to make partial year claims beneficial to property owners, regardless of the time a property is owned and rented.
Immediate write-off is one tool used. Any item added to a property costing less than $300 can be immediately written off within the first year. This is regardless of how many days the property is owned in that year.
Low-value pooling can also be used to maximise claims over a short period of time. Low-value pooling applies to items in an investment property that are worth less than $1,000. Placing items in a low-value pool allows the owner to accelerate the rate of depreciation, increasing deductions earlier.
A high-quality tax depreciation schedule should include a partial year claim based on the time the property is rented.
Receive payments regularly using Pay as You Go (PAYG)
Investors often look forward to tax time. Many of the losses from holding a property can be claimed back, including interest, rates, repairs and maintenance, property management fees and depreciation deductions.
Many investors may not realise that they don’t have to wait all year to benefit from the deductions available to them. Instead, they can improve their cash flow throughout the year simply by nominating to use a Pay as You Go (PAYG) withholding variation.
Introduced in July 2000, a PAYG withholding variation allows individuals to vary the amount of tax withheld by their employer in each pay to anticipate their tax liabilities. This means that they can take advantage of the deductions available to them regularly, rather than waiting until the end of a financial year for their tax refund.
By selecting a PAYG withholding variation, a property investor’s expected tax refund for the financial year is estimated. This allows their employer to take less tax out of their wages.
As can be seen in the example, a PAYG withholding variation will provide added flexibility for a property investor. Having access to the extra money during the year makes it easier to manage cash flow, especially when there can be surprise costs such as urgent repairs or maintenance. The additional income also gives the owner the option to invest the extra money or reduce loan liabilities.
It is important to note that submitting a PAYG withholding variation does not replace a normal tax return. A tax return still needs to be filed at the end of the year to calculate the actual amount of tax liability.
Claim missed deductions
If you have not previously claimed depreciation deductions on your investment property, the ATO allows you to recoup missed payments for past financial years by adjusting your tax return.
This is particularly useful for first time investors who were previously unaware of depreciation deductions.
It is always advisable to stay on top of your finances by claiming deductions in the applicable year, as delaying your claim will only add extra confusion and stress to your next tax return.
Ordering your tax depreciation schedule before 30 June is important if you want to maximise your returns and keep your finances on track.
If you have any questions about claiming depreciation, contact the expert team at BMT Tax Depreciation on 1300 728 726 or Request a Quote.