Depreciation can be a rather complex topic with specific rules, qualifying dates, depreciation rates, methods for claiming and pre-determined effective lives of assets. As such, claiming depreciation deductions can be a confusing task for many property investors.
Don’t be fooled into thinking you can save money by doing it yourself. Investors should ask a depreciation specialist to prepare their tax depreciation schedule.
We explore ways investors sometimes get depreciation wrong and help explain how a Quantity Surveyor can become a property investor’s best friend.
- Ignoring claimable items
- Categorising items incorrectly
- Not splitting deductions correctly as co-owners
- Incorrectly claiming repairs, maintenance and capital improvements
- Don’t be fooled
Ignoring claimable items
One of the most common depreciation mistakes made by investors who do not seek expert advice is that depreciable items are simply missed.
With more than 6,000 depreciable plant and equipment assets listed by the Australian Taxation Office (ATO), it’s easy for investors to overlook common household items that hold deductible value.
To ensure these claimable items are not missed, a specialist Quantity Surveyor will create a depreciation schedule – a report outlining each claimable item of a property’s building structure and its fixtures and fittings.
Depreciation schedules outline capital works allowance deductions for the structural elements contained in the building such as walls, floors and ceilings (Division 43). They also include eligible plant and equipment depreciation for the easily removable items such as hot water systems, blinds and stoves (Division 40).
Categorising items incorrectly
Another common mistake is when property investors categorise assets incorrectly. For example, some investors mistakenly assess carpet as a permanently fixed asset rather than a removable asset.
If an investor claims carpet that costs $3,650 using a rate of 2.5 per cent (provided for structural deductions and fixed items), they would be claiming $91. However, if depreciated at the correct rate of 20 per cent, they could claim $730 in the first financial year.
Also, some self-assessors may realise they could have claimed much more in previous years but choose not to do so, as they incorrectly believe the rules don’t allow it. The good news is, the 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.
Not splitting deductions correctly as co-owners
Many co-owners make the mistake of calculating depreciation first and then splitting the deductions based on ownership percentage.
However, depreciation legislation allows co-owners to split an asset’s value by ownership percentage first, potentially qualifying them for higher rates of depreciation, meaning more money back in both owners’ pockets sooner.
Co-owners can request a split depreciation schedule to ensure deductions are outlined based on each owner’s interest in the assets contained within the investment property.
Incorrectly claiming repairs, maintenance and capital improvements
Expenses for repairs and maintenance are claimed differently to capital improvements. The ATO provides clear definitions of each to help investment property owners to ensure these claims are made correctly.
Repairs (work completed to fix damage or deterioration to a property) and maintenance (work completed to prevent deterioration to a property) should be claimed as an immediate deduction in the year an expense occurred.
However, any capital improvements (work which improves the condition or value beyond its original state at the time of purchase) must be claimed as a capital works deduction or as plant and equipment depreciation.
Don’t be fooled
It’s always best to employ the services of a Quantity Surveyor that specialises in tax depreciation, such as BMT Tax Depreciation, to prepare a tax depreciation schedule for your investment property.
This will ensure these deductions are not missed in addition to safeguarding investors that their deductions for all qualifying assets are maximised and compliant with ATO legislation.
A BMT Tax Depreciation Schedule will cover the life of the property, can be easily used by your Accountant when preparing your tax returns and will ensure that commonly missed deductions will not go unnoticed.