Investors who are considering buying a second-hand property often ask whether they can claim tax deductions for renovations that have been completed by a previous owner.
The rules have always been complex for investors to understand and for this reason it’s best to consult with a specialist Quantity Surveyor for expert advice on the property being considered. Given the changes to depreciation legislation relating to plant and equipment found in second-hand properties passed by the federal government in November 2017, it’s now more important than ever to obtain a comprehensive depreciation schedule.
Claiming tax deductions for structural work
The Australian Taxation Office (ATO) allows investors to claim capital works deductions in any residential building where construction commenced after the 15th of September 1987.
Capital works deductions make up 85-90 per cent of a total depreciation claim. This applies to the structural items of the building and any fixed items, such as the walls, doors, windows, kitchen cupboards, retaining walls, toilets, sinks and the roof.
For a residential property, investors can claim capital works deductions at a rate of 2.5 per cent per year for a maximum of forty years from the property’s completion date.
Many investors think that due to these date restrictions, if a property pre-dates 1987 they won’t be eligible to claim capital works deductions. However, this is often not the case, as many investment properties built prior to 1987 have undergone some form of renovation.
The ATO allows property investors to claim capital works deductions for structures added by a previous owner so long as the work is completed within the qualifying dates.
The good news for investors is that the Federal Government has not changed the way capital works deductions are applied within the legislation changes. Investors can continue to claim depreciation capital works improvements made by prior owners as before.
Claiming deductions for plant and equipment assets installed by previous owners
Previously, under existing legislation investors could claim plant and equipment items (which are the easily removable assets for example ovens, range hoods, smoke alarms, carpets and exhaust fans) in any residential property no matter how old the building.
However, under the Federal Government’s new legislation any investor who exchanges contracts on a second-hand property after 7:30pm on the 9th of May 2017 can no longer claim tax deductions on previously used plant and equipment assets installed by a previous owner. Investors can only claim depreciation on those items they purchase and add to the property themselves.
It’s important to be aware that owners of newly built properties can still continue to claim plant and equipment depreciation deductions as normal.
For those who exchanged contracts prior to 7:30pm on the 9th of May 2017, the legislation was grandfathered. This means these investors can continue to claim depreciation for work completed by previous owners under the pre-existing legislation.
Example scenario – tax deductions for renovations completed by a previous owner
The following table provides examples of some of the tax deductions an investor could claim for renovations completed to an investment property by a previous owner.
In the above scenario, the investor exchanged contracts and settled on the property prior to 7:30pm on the 9th of May 2017. Therefore, they are still eligible to claim depreciation for plant and equipment additions that were made by the previous owner. They are also eligible to claim capital works deductions for structural work completed.
However, if the renovations was completed in a property where the investor exchanged contracts after 7:30pm on the 9th of May 2017, the deductions would be reduced to only include the structural work completed including fixed items (such as the retaining wall, the outdoor deck, kitchen cupboards and toilet).
The table below demonstrates the difference in deductions for an investor who exchanges contracts after 7:30pm on the 9th of May 2017 based on the new legislation.
If an investor purchases new plant and equipment assets themselves and has these installed in a property, the depreciation for these assets can be claimed using the existing depreciation methods, no matter how old the property is or when they exchanged contracts. Learn more about scrapping here.
A specialist Quantity Surveyor can ensure that an investor claims the correct depreciation deductions based on their individual scenario, including any work completed during renovations.
By contacting an expert and arranging a comprehensive tax depreciation schedule, this can help an investor to ensure the deductions they claim are correct and in line with the latest policy enforced by the ATO.