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Can I claim depreciation when operating a home-based business?

BMT team — Mon, 23 Sep 2019 00:17:12 +0000

When operating a home-based business, many owners are not aware of the lucrative depreciation deductions available. If you’re one of them, you may be missing out on thousands of dollars. With improvements in technology and the convenience and flexibility that working from home provides, according to business.gov.au ‘nearly one million people [are] running a business from home [with] home-based businesses [now] a large part of the Australian business community’. In this article we will explore: What expenses can I claim when working from home? What are the rules? What type of insurance do I need? What expenses can I claim when working from home? Substantial tax depreciation deductions are available to home-based business operators. The ATO allows owners of income-producing properties to claim depreciation deductions on both the structure of a building (capital works) and easily removable assets (plant and equipment). When operating a home business, the same rules apply to the area of the home and the assets within it that are used solely for income-producing activities. Home based business operators can claim an apportioned tax deduction for use of home office utilities and business phone costs (not including phone installation). In some cases, you can also claim occupancy expenses including rent, mortgage interest, insurance and rates, but it’s best to consult your accountant to confirm if your specific business qualifies. If you own your home, you can also depreciate a portion of the cost of your house that’s used to run the home-based business. Additionally, owners can deduct the cost of any repairs made directly to the office area. Let’s look at a case study showing some of the available deductions and the significant difference claiming these deductions can have on a home-based business operator’s cash flow. In the example above, the original value at purchase is shown for each item. Using the diminishing value method, BMT calculates the first-year deductions available would be $3,405 in total plant and equipment depreciation. Over five-years, depreciation deductions amount to $7,983. Total capital works depreciation over the first year is $171 and over five years totals $854. The owner of this small business home office can claim a total of $3,576 in tax depreciation deductions during the first year and $8,837 over a five-year timeframe, improving the cash flow of the business. What are the rules? For a home office to be eligible for tax depreciation deductions, there are three main rules stipulated by the Australian Tax Office (ATO) that must be complied with. You must operate your business from your home You must carry out income-producing work from home Expenses incurred must be in direct relation to using your home to operate your business. Small businesses with turnover up to $10 million (from 1 July 2016) are eligible for an instant asset write-off of $30,000 for assets purchased from 2 April 2019 to 30 June 2020. Different instant asset write-off thresholds apply for purchases made before then. In the example above, if the home business is a small business, all assets shown would be eligible for the instant asset write off. Assets with a value above $30,000 can still be deducted over time using the small business pool. These assets can be claimed at a rate of 15% in the first year they were purchased and used or installed, then at 30% each year following. Once the asset value falls below $30,000, they can be instantly written off. Capital gains tax (CGT) is the amount paid to the government when you sell an asset that has increased in value over time since you purchased it. Generally, a home is exempt from CGT, unless part of the home is income producing and you acquired your home on or after 20th September 1985 (when the tax on capital gains began). According to the ATO, in most cases ‘you can ignore a capital gain or loss you make when you sell your home or main residence (under the main residence exemption).’ If you started using your home as your primary business location after 20 August 1996, you cannot claim ‘capital gains and the main residence exemption’ for the time prior to this date. You would then need to use the market value of your home from the date you started using it to produce income. For this reason, it’s recommended you obtain a valuation on your home when you start operating a home business. Otherwise, you may find when you sell the property, you’re required to pay more in capital gains tax. With your home-based business, you may also be eligible to apply for small business CGT concessions to reduce your capital gain. What type of insurance do I need? Operating a business from home can bring certain financial risk. Manage the risk with an appropriate level of insurance, as home and contents insurance is likely to only cover residential use, rather than activities relating to your business operations. Depending on the type of business you’re operating, it’s wise to look at business-specific insurance. If you don’t already have insurance or you’re unsure if your insurance is adequate, contact BMT Insurance. Operating a home-based business can be both exciting and daunting. The independence, lifestyle, flexibility and tax deductions can make it all worthwhile. To find out more about how depreciation deductions can help your home based business, Request a Quote or contact the expert team at BMT Tax Depreciation on 1300 728 726.

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Equally important objectives, but not a level playing field

Simon Pressley — Fri, 30 Jun 2017 04:57:44 +0000

The property investor and the owner-occupier: while their primary motivations for buying a property might be different, they both have legitimate and equally important reasons. Consider this scenario. Mary (an owner-occupier) and Jane (an investor) are both interested in buying a particular property worth $450,000. Mary is motivated by how the property satisfies her and her family’s important lifestyle needs at this stage of their lives. Just as important, Jane is motivated by the goal of being able to afford a particular lifestyle later in life which a (forever shrinking) taxpayer-funded pension will not provide. But, the costs to the property owner are quite different, depending on whether it’s Mary or Jane who becomes the eventual owner. For the purpose of this exercise, let’s assume this property is located somewhere in the state of Queensland. Mary will pay approximately $8,400 in stamp duty for the property while Jane will be slugged at extra $7,000 if she buys the property with the intention of providing shelter for third parties, as opposed to herself. All property owners would hopefully acknowledge the importance of neighbourhood parks, footpaths, roads, and services such as rubbish removal which are funded by council rates. But, even though they quite possibly don’t directly benefit from any of these services, many city councils charge a higher levy to an investor than an owner-occupier. Even though Mary and Jane may have borrowed the same amount of money to buy this hypothetical $450,000 property, in this financial climate, Jane will pay between $1,500 and $2,000 extra interest on her loan each year than Mary. Recent interventions by the Australian Prudential Regulation Authority have resulted in investment property loans incurring 0.6 per cent to 1 per cent higher interest rates. Fast forward (say ten years from now) and Mary or Jane decide they wish to sell the property. Mary’s personal circumstances may require her to move house whereas Jane’s equally important circumstances may necessitate her to sell to support her retirement. If Mary sold the property as an owner-occupier she would retain 100 per cent of the sale proceeds whereas Jane would be liable for capital gains tax (a figure that could be six-digits). This scenario provides important context for the segment of Australia’s population whom (quite strangely) seem to think that investors have advantages over owner occupiers. To the contrary, investors pay extra in more ways than one. So, no, it’s not a level playing field – investors well and truly pay full freight. At the end of the day, it shouldn’t be an US (owner-occupier) versus THEM (investor) thing. The personal motivations of Mary and Jane are both important and ought to be respected accordingly.

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Add value and increase deductions with an alfresco area

BMT team — Mon, 22 Feb 2016 22:57:25 +0000

Claim depreciation on outdoor structures and save Australia is made for outdoor living, so it is little wonder that alfresco areas have become sought after additions in any property. Owners see great value in adding permanent weatherproof structures to an investment property. Creating an indoor-outdoor environment which can be enjoyed all year round not only adds value to the existing property, but it can also help to attract potential tenants and potentially increase the annual rental yield. What many investors don’t realise is that by adding an alfresco or an outdoor structure of any kind, they will also impact the depreciation deductions they can claim. Any structures added to an investment property will entitle the owner to claim additional capital works deductions, also known as building write-off, at a rate of 2.5 per cent per year. If the owner installs any new plant and equipment items, including removable or mechanical assets, this will also entitle the owner to claim depreciation deductions for these items. The deductions an owner can claim for any new plant and equipment items will be based on the individual effective life of each item as set by the Australian Taxation Office. Case study Let’s take a look at a scenario in which an investor decided to add a seven metre by four metre outdoor alfresco to their existing four bedroom investment property. The structural work on the alfresco cost $15,010. The owner also chose to install plant and equipment assets totalling $9,217 in value, bringing the total cost of work done to the property to $24,227. Below is a summary of the costs of the new additions and the first full year depreciation deductions the owner could claim. As the table shows, the owner of this property could claim $375 in capital works in the first full financial year deductions for structural items such as the concrete slab, walls, tiles, roof and lattice screening. The owner of the property would also be entitled to claim capital works for the remaining life of the property (forty years) for new structural items. Plant and equipment assets installed such as an outdoor ceiling fan, outdoor furniture, a freestanding BBQ, light shades and garden solar lights resulted in a $3,831 deduction in the first full financial year for the property owner. This brought the total depreciation deduction of new items installed to $4,206 for the owner. These deductions would be in addition to any remaining depreciation deductions the owner could claim from the pre-existing property. It is important to note, that if the property owner was to remove any existing structures or assets during the process of adding the alfresco area, they may also be entitled to additional deductions. If any remaining depreciation deductions exist for items or assets being removed during a renovation or addition, the property owner may be entitled to claim a deduction for the full amount of the remaining depreciation for items scrapped within the financial year of their removal. Learn more: What is scrapping? Property owners should always seek the advice of a specialist Quantity Surveyor when they plan to make any alterations to their rental property. If the owner has an existing depreciation schedule, the owner will need to have it updated, and if assets or structures are being removed, the Quantity Surveyor should perform a site inspection before and after work commences to ascertain the remaining depreciation of items being removed and value new structures and items added to update the depreciation schedule for the owner. To find out more or request a quote for a tax depreciation schedule call 1300 728 726 today.

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Claiming depreciation will assist an investor’s cash flow

Bradley Beer — Thu, 04 Jun 2015 06:13:31 +0000

Properties that generate income for their owner will make the owner eligible for significant taxation benefits. Of all the tax deductions available to property investors, depreciation is most often missed because it is a non-cash deduction – the investor does not need to spend money to claim it. Research shows that 80% of property investors are failing to take full advantage of property depreciation and are missing out on thousands of dollars in their pockets. As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a tax deduction. Claiming depreciation on an investment property can make a big difference to an investor’s cash flow. In order to claim these deductions, we encourage investors to enlist a specialist Quantity Surveyor to complete a tax depreciation schedule. This schedule outlines the deductions available on specific property and is used by the investor’s Accountant when preparing a tax return. For one investor who had a tax bill from the previous year, the results were significant: “I just wanted to let you know that our tax bill for last year of $2,600 became a tax cheque of $12,000 just because of the tax depreciation schedule. Thank you,” said Tiana, of Benowa Queensland. Both new and old properties have the potential to attract significant depreciation benefits for the owner to claim as a tax credit. Property owners are also able to go back and claim missed deductions on previous financial year’s tax returns. Read more: Claim depreciation on older properties For an investor experiencing negative cash flow on their property, depreciation can be the key to turning their situation into a more positive scenario. Another investor who owns a property purchased at $420,000 with a rental income of $490 per week with a total income of $25,480 per annum; had expenses for the property such as interest, rates and management fees totalling to $32,000. By claiming depreciation, we were able to turn their negative cash flow position into a positive one, saving them $4,255 for the year. The following scenario shows this investor’s cash flow with and without depreciation. This investor used property depreciation to turn their negative cash flow position into a positive one. Without depreciation they were paying out $79 per week. By taking advantage of tax legislation and making a depreciation claim, the investor was able to turn their loss to an income of $3 per week. In total, BMT Tax Depreciation saved this investor a total of $4,255 in just one year. Ensuring that each depreciation claim is maximised on any building requires a combination of construction costing skills and thorough knowledge of current tax depreciation legislation. For this reason, it is recommended that investment property owners consult a specialist Quantity Surveyor to prepare a depreciation schedule prior to lodging their tax return. Learn more: See how a specialist Quantity Surveyor maximises an investor’s cash return BMT Tax Depreciation are accredited with the Australian Institute of Quantity Surveyors (AIQS), The Royal Institute of Chartered Surveyors (RICS) and The Auctioneers & Valuers Association of Australia (AVAA). We pride ourselves on providing prompt and professional service to our clients, which has been mirrored in their feedback. “This was one of the best customer service experiences ever. From the first call to the inspection and the schedule, everyone was very professional,” said Ken and Maree, of Wangaratta South Victoria. Call 1300 728 726 for a free estimate of available depreciation deductions or request an estimate for your investment property today.

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Should you turn your investment property into a doghouse?

Bradley Beer — Wed, 22 Oct 2014 22:58:04 +0000

Pet owners could be your solution to increasing rental yield It’s no secret that property investors hate pets in their investment properties. They can be unpredictable, messy and destructive. It should come as no surprise that internal research conducted by realestate.com.au has shown that approximately only 5% of their rental listings are pet-friendly. However, for property investors concerned with improving their rental yield, reconsidering this preconception could provide thousands of dollars annually in additional rental income. Doing the math Property investors often associate pets with higher maintenance and overall costs, but extensive studies conducted in the US have shown differently. ‘Companion Animal Renters and Pet-Friendly housing in the U.S.’ found that pet-friendly properties are typically leased out in nineteen days, compared to the twenty-nine days it takes on average to find a tenant for a pet-unfriendly property. Assuming weekly rent of $450/week, this already leaves the pet-friendly property owner $641 better off once both properties are tenanted. Australian research has also shown that pet owners are willing to pay between 7-14% more rent for the right to keep their pets. For the purposes of this exercise, this will increase the rent for the pet-friendly property to $500/week. For a twelve month lease, this extra $50 a week will add up to $2,600 in additional income. Pet owners also stay longer; because it is so difficult to find pet-friendly accommodation, they are usually very reluctant to move on. This means that the properties’ owners have half as many vacancy periods to worry about. With an average vacancy period of twenty-nine days for investment properties that do not allow pets, on average this adds up to another $1,859 in lost income. In regards to the costs of additional damage caused by pets, research data has defied expectations by showing that there is little, if no, difference in overall maintenance and repair costs for investment properties with and without pets. Given how difficult it is for pet owners to find accommodation, they have a vested interest in ensuring that no harm comes to any rental property they manage to secure. With so few rental properties allowing pets on the market, the overwhelming demand for pet-friendly properties also allows owners to be far more selective, screening potential tenants and their references to ensure that they are not only responsible pet-owners, but responsible tenants as well. Due to these factors, the total difference in annual damages found in the U.S. research between tenants with and without pets was only $39USD, which was not judged as substantial enough to form a statistical difference, especially considering all the financial benefits received by keeping properties pet friendly. A much more significant cause of property damage, according to the same data, was children. Families with children were found to cause an additional $150USD damages over childless tenants each year. Fortunately, not many property investors were made aware of these results, sparing us from a lot of angry, homeless parents and some very pleased pets. Crunching the numbers, the difference in rental yields of properties that allow, and prohibit, pets ends up looking like this: For investors looking to increase their rental yields, allowing pets on a property is a far more cost effective solution than undertaking a costly bathroom or kitchen renovation. If concerns for damages still weigh on your mind, Pet Agreement Forms are readily available online, allowing investment property owners to more strictly regulate the terms on which pets may be kept on the premises.

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Investor story: Quantity surveyor and tax depreciation specialist Bradley Beer

Bradley Beer — Fri, 11 Jul 2014 06:00:45 +0000

BMT’s Managing Director, Bradley Beer recently sat down with Property Observer author Jessie Richardson to discuss the lessons he’s learned over the past thirteen years as a property investor. Throughout this interesting insight into his strategy Brad details some of the trials and tribulations he’s faced as a property investor including some invaluable tips for new investors. Below is the full transcript of his interview. THE BEGINNING I bought the first property in 2001. It was an old, very rough, four bedroom house in the Newcastle area, with a big shed out the back, which I still own. Then I went straight into a serious amount of renovation. I’ve done a number of renovations over the years, and that was the first one. I was up at whatever hour of the night, after work, whenever possible on the weekends. It was pretty ugly to start with. I did that on the first one, and I did that on the second one. Then I bought some land. At that time in my life I didn’t have much equity. So I bought, I renovated, I revalued. I pulled the equity back out so I could go again. There was a lot of buying and renovating; manufacturing more equity out of the properties by going, “This is a two bedder but I can do this, this and this to make it a three bedder”. The fact is I just didn’t have equity at the time; I didn’t have any money. Hindsight is a wonderful eye-opener, and one thing I might have done differently was to use Lenders Mortgage Insurance on my first property instead of saving 20%, allowing me to buy two properties at the same time. It would have been beneficial in this instance as there was a lot of growth in the New South Wales market in those first couple of years, and in hindsight I realised I missed a chunk of it because I was trying to do things the “right way”. But you learn from these things. On any renovation you budget a certain amount to do works, and even as a Quantity Surveyor, you live in a dream land. There have been mistakes along the way, but did I make any major mistakes and completely ruin anything? The answer’s “no”. Did I find bigger problems than I expected once I pulled the walls off? Yes. You’ve just got to allow for those sorts of things. There are properties I own now that I wouldn’t have bought if I had my time again. That’s because I know more about investing properties now than I did back then. I bought land at a time when I shouldn’t have. We had the GFC a couple of years later, around the time that I settled. It wasn’t the right time in my portfolio to buy land, based on the cash flow (or lack thereof) it was going to generate. I was speculating and purchased the property on its growth potential, and I had to settle when the GFC hit, which I was financially able to do at the time, but it did tie up equity in something I shouldn’t have bought. Fundamentally, a lot of things I believe about investment haven’t changed. I would probably buy a lot of similar properties to what I have bought, even though hindsight can change things considerably, of course. I don’t have the physical time or the want to go and renovate at the moment, especially not personally. So that changes the cost of things considerably. My position is more comfortable now from an equity perspective and from an available cash perspective. The fact is, one of the keys to investing in property is learning to manage financing properly and having control of cash. I have control of more cash now through my property investing. RENOVATION: A CASE STUDY Property in Newcastle area Purchased in 2006 for $262,500 Two bedrooms One bathroom Spent $25,000 on renovations Bank valuation after renovations $360,000 Rent after renovations $310 per week Current rent $430 per week Current valuation $460,000 I’m not a “put it all on everything” kind of guy. I haven’t really got any properties in mining towns. There’s a risk associated with that. I have the kind of portfolio where I could take some risk now, but I’ve just been too busy to find one. And I think properties in mining towns should not be an early part of your investing, they should be part of your portfolio when you have the ability to take some risk. They certainly have risk attached, but then they have high returns attached as well. You need to learn a lot of things about investing in property before you invest in property. You need to learn how to structure your finance in a way which provides flexibility with cash, as well as control of your own journey or property investing “destiny”. One of my main mistakes was not investing in property earlier, based on my risk profile at the time, due to lack of knowledge. It’s all about gaining as much knowledge as possible as early as possible, learning how to manage financing, understanding what type of property, based on your risk profile, you should be buying and also what you can reasonably afford. I also did a bit of research into property markets, tax and that sort of thing during my university studies. So I understood that is a part of it too. I learned by hanging around the property industry, going to property events to talk about depreciation, reading books and actually learning about the fundamentals. I’ve continued to do that over time. LONG-TERM INVESTMENT Unfortunately Australia, like any other country, can sometimes assume a herd mentality – especially with property investment. Buying in areas that have hot growth but which lack fundamental reasons for that growth to continue is not something that you should do. But we do it in Australia. It’s why we have cycles in property […]

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The benefits of making a depreciation claim for student rental property owners

Bradley Beer — Fri, 21 Feb 2014 06:21:22 +0000

The month of March ushers in the autumn season, marks the kick off to the footy season and echoes the bustling sounds of higher education institutions bubbling and frothing with hope and potential. For 223,200 students, 2014 will be their first year of university, taking the total of university students around the country to over 1 million. This means demand for student rental property accommodation has become quite competitive between students and families looking for well situated properties. Student accommodation is increasing in demand as Australia becomes the third most popular international student destination behind the United States and the United Kingdom. Student accommodation is an asset class with potential, but caution is advised when considering investing in student rental property. Here are a couple of points to consider: Higher management fees Screening for the right tenants Read more: How to survive and profit from property’s student boom Many student rental property investors are often unaware they are eligible to receive significant taxation benefits. Research has shown that nearly 80% of all property investors fail to take advantage of property depreciation, and therefore miss out on thousands of dollars in available deductions. BMT complete tens of thousands of depreciation schedules for investment properties each year. On average, those schedules find between $5,000 and $10,000 as a first full year deduction for rental property owners. This is no small amount, so for investors wondering what is property depreciation and how can they go about making a claim, I’ll explain. Property depreciation is a non cash deduction the Australian Taxation Office (ATO) allows the owner/s of an investment property to claim due to the wear and tear of a building structure and its fixtures and fittings over time. It is described as a non cash deduction because the investor does not need to spend any money to be eligible to claim it. The following scenario provides one example of an investor’s cash-flow with and without depreciation. This investor owned a property purchased at $420,000, with a rental income of $490 per week and a total income of $25,480 per annum. They had expenses for the property such as interest, rates and management fees totaling $32,000 By claiming property depreciation the owner was able to turn their negative cash-flow position into a positive one. Without depreciation they were paying out $79 per week. By taking advantage of taxation legislation and making a depreciation claim, the investor was able to turn their loss to an income of $3 per week. In total, BMT Tax Depreciation saved this investor a total of $4,255 in just one year. I recommend that you contact a Quantity Surveyor, such as BMT Tax Depreciation, to compile a tax depreciation schedule. The Quantity Surveyor will perform a site inspection and take photos of all plant and equipment to ensure no depreciable asset is missed. They will also use their knowledge of current ATO legislation to select the best methods to calculate depreciation to maximise the claim available for the owner. For a free over the phone assessment of the likely deductions for an investment property that is being used as student rental accommodation, please contact one of my professional staff members on 1300 728 726 or complete this form to request an estimate today.

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Claim $4,852 in twenty nine days

BMT team — Thu, 01 Nov 2012 05:49:31 +0000

A tax depreciation specialist can help you claim maximum depreciation deductions – even on a newly purchased property near the end of a financial year. Organise a depreciation schedule before settlement You can maximise partial year deductions with a depreciation schedule prepared by specialist Quantity Surveyors who have insider legislative knowledge to help you make the most of a partial-year claim. Don’t wait until the next financial year to save money – start claiming partial year deductions now! Immediate write-off A specialist Quantity Surveyor can make use of legislative tools to make partial year claims more beneficial to the owner; regardless of how long a property has been owned and rented. Any item in a property that’s valued at under $300 can be written off immediately – regardless of how many days the property’s been owned. You can also take advantage of low-value pooling – where groups of items worth less than $1000 are depreciated together. How one BMT client saved thousands An investor purchased a house for $550,000 and rented from June 2. Even though this property was only owned and rented for twenty nine days, the owner was able to claim back $4,852 for the first financial year. How? BMT Tax Depreciation was able to find: $1,288 in immediate write-off allowance for items costing under $300 $2, 274 for low-value pooled items, and $520 by depreciating remaining items based on the remaining financial year. A BMT report and tax depreciation schedule will list partial year claims in a separate column, making the process simpler for your Accountant. Download the detailed case study available in Maverick – Issue 32 Why use BMT Tax Depreciation? A qualified tax depreciation specialist is able to help property owners maximise their depreciation claims. We use current legislation available through the Australian Taxation Office to ensure that depreciation claims can be truly maximised – even for a partial financial year. Request a quote today to find out how a specialist Quantity Surveyor can help you accelerate the depreciation benefits of your investment property today.

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