While depreciation deductions provide a valuable opportunity for property investors to maximise their cash flow, this could be reduced if you fail to lodge your tax return on time and don’t seek expert advice.
A key deadline if you are planning to lodge your 2017/2018 tax return online as a self-assessed claim without the help of an Accountant is the 31st of October. However, by lodging your return online, you could be at risk of missing out on valuable deductions or even put yourself at risk of an Australian Taxation Office (ATO) audit.
Property depreciation is a genuine tax deduction that property investors can claim against their income, yet annually, countless Australians miss out on property depreciation.
Unlike most tax deductions, property depreciation is a ‘non-cash expense’, meaning you don’t actually need to splash out the cash every year in order to make a claim. However, you do need a valid tax depreciation schedule, which is 100 per cent tax deductible.
If you’re preparing your tax return and own an investment property, it’s important to contact a specialist Quantity Surveyor and obtain a comprehensive tax depreciation schedule. Quantity Surveyors are recognised by the ATO as one of a few professionals with the necessary knowledge to calculate construction costs for depreciation purposes. Together with your Accountant, they can provide guidance to steer you on the right path to ensure your claim is correct and you receive the best possible deductions. This also means you’ll have the adequate evidence necessary should the ATO question any of your claims.
Legislation changes for property investors
As part of the 9th of May 2017 federal budget, the Australian Government proposed changes to rental property depreciation deductions. This has caused some confusion amongst property investors in regard to what can be claimed. It’s important to remember that the change in legislation only affects second hand residential properties.
The good news is there has been no change to legislation for capital works (division 43) assets. This means investors can still claim deductions for the irremovable structural elements of a building such as ceilings, foundations, walls, swimming pools, windows and toilets. The changes only apply to plant and equipment (division 40) assets, which includes assets that are not part of the properties structure such as carpets, ovens, dishwashers, blinds and smoke alarms.
To read more about the new depreciation legislation and how this applies to a range of property investment scenarios, download BMT Tax Depreciation’s comprehensive white paper document Essential facts: 2017 Budget changes and property depreciation.
Self-assessed vs expert assessed schedule
It is not uncommon for a property investor to self-assess or estimate costs for their investment property, based on their own judgement, potentially missing out on significant depreciation deductions. A depreciation schedule prepared by a qualified Quantity Surveyor will ensure all depreciation claims are maximised within ATO legislation and that no depreciable assets are overlooked.
Following is a real example of a client’s self-assessed depreciation deductions compared to the depreciation deductions identified by a BMT Tax Depreciation expert for an investment property.
The client purchased a brand new three bedroom house in an outer Sydney suburb for $689,000.
*The depreciation deductions within the example have been calculated using the diminishing value method.
In the first full year BMT identified an extra $7,402 in depreciation deductions and an extra $29,612 in deductions in the first five years.
When completing a depreciation schedule, BMT Tax Depreciation will inspect the property to ensure no items are missed. The completed schedule can then be shared with your tax agent.
For more information on property depreciation and what deductions you can claim from your investment property, visit the residential property depreciation page on the BMT Tax Depreciation website. Alternatively, you can contact the expert team at BMT on 1300 728 726 for obligation free advice.