» claiming depreciation

Missed claiming depreciation last financial year? It’s still not too late!

BMT team — Fri, 12 Jul 2024 23:52:02 +0000

You don’t need to daydream about a lottery win to get thousands in your pocket. If you’re a property investor, a natural process called depreciation means you can claim thousands, sometimes tens of thousands, without spending any money. BMT research suggests that approximately 80 per cent of investors fail to take full advantage of property depreciation. In some instances, it’s because they aren’t aware of when they are eligible to claim. BMT has answered your questions about when you can claim depreciation, and what to do when your tax depreciation schedule isn’t prepared before June 30. Contents What is property depreciation and how do you claim it? Order a schedule after June 30 and still claim for the last financial year Your tax depreciation schedule starts from your settlement date Genuinely available for rent Partial year deductions Key points: A tax depreciation schedule can be completed after June 30 Depreciation deductions start from your settlement date, not when the report was completed Depreciation can be claimed if the property is genuinely available for rent Partial year deductions are available for all investment properties What is property depreciation and how do you claim it? Depreciation is the natural wear and tear of a building’s structure and assets. If you’re an investor, you can claim this depreciation as a tax deduction. Depreciation is called a non-cash deduction because you don’t need to spend any additional money in order to claim it. A tax depreciation schedule is an essential piece of the depreciation puzzle. The first step of this process is a site inspection completed by a specialist site inspector from a quantity surveying firm. From here, the firm prepares a tax depreciation schedule that includes all depreciation deductions available. An accountant uses this schedule to determine your deductions at tax time. The tax depreciation schedule lasts the life time of the property and can be revised if any changes are made, such as a renovation. Order a schedule after June 30 and still claim for the last financial year You can still claim depreciation for the last financial year if your property’s tax depreciation schedule is completed after June 30. For example, if you ordered a tax depreciation schedule in July 2024 you can still claim depreciation deductions for the 2023/24 financial year. The only difference ordering a schedule before June 30 makes is how quickly you can claim back the schedule fee. This 100 per cent tax deductible fee can only be claimed in the year it was paid. Your tax depreciation schedule starts from your settlement date It’s important to know that it’s never too late to claim depreciation. When depreciation is missed in previous years, a tax depreciation schedule lets you claim back missed dollars. This is because the schedule starts from your settlement date, not the date the schedule was prepared. If you own a second-hand property and can’t claim depreciation on previously used assets, it’s important to let the quantity surveyor know of any new additions you have added to the property. This will allow you to claim depreciation deductions on them as they aren’t affected by the 2017 legislation changes. Genuinely available for rent Your investment property doesn’t need to be leased to allow you to claim depreciation deductions. As long as the property is ‘genuinely available for rent’, depreciation can be claimed. This means if there’s a gap where you are searching for new tenants, depreciation deductions are still available. Partial year deductions You can still claim depreciation deductions if you settled the property during the financial year, or if it’s only available for rent for part of the year. A tax depreciation schedule considers what is called ‘partial year deductions’. This means even if there is only a few days, weeks or months left in the financial year, depreciation deductions are still available. Partial year deductions are calculated on a pro-rata basis using the time the property was used as an investment. There are also mechanisms in depreciation legislation that a specialist quantity surveyor will apply to increase the claim for a partial year, even if the partial year is only a few days. This includes the immediate write off and low value pooling which allows you to claim particular qualifying new assets in full or at an accelerated depreciation rate regardless of how long they were owned. BMT specialises in preparing comprehensive tax depreciations schedules. We ensure that nothing is missed and that the highest level of compliance is maintained. To learn more about depreciation and the services offered by BMT, Request a Quote or contact the team on 1300 728 726.

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Ways to maximise depreciation tax deductions

BMT team — Wed, 21 Feb 2024 04:53:27 +0000

With ongoing interest rate hikes and subsequent increases in mortgage repayments, it has become increasingly crucial for property investors to find ways to enhance their cash flow. A strategy to achieve this is to maximise the depreciation tax deductions on their investment properties. 1. Get an onsite inspection Research shows that 80% of investors don’t claim the maximum depreciation deductions on their investment properties. Only a specialist quantity surveyor will spot the dollars hidden in the details. Quantity surveyors are highly specialised and when construction work is undertaken or assets are added or removed from a property during its income-producing period, an expert will be able to calculate the depreciation tax deductions accordingly. New as well as older properties can qualify for substantial depreciation tax deductions, but these are often not visible without a physical site inspection. A site inspection by a specialist will ensure that every potential deduction is uncovered and maximised, so that the highest possible depreciation amount can be claimed. In 2023 the Australian Institute of Quantity Surveyors released a white paper stating that the most reliable and secure way to maximise the depreciation deductions on an investment property is by engaging a qualified, reputable quantity surveyor with an onsite inspection to ensure a reliable depreciation schedule. Choose a property depreciation expert like BMT Tax Depreciation who will conduct a site inspection before completing the depreciation schedule. 2. Talk to a specialist Property tax depreciation refers to the wear and tear of an income-producing property and its assets over time. Irrespective of the type of property, renovating and completing upgrades may be an effective way to increase rental income and grow the value of a property, while maximising tax deductions on the investment through depreciation. When it comes to commercial property, both the owner and tenant can claim depreciation tax deductions. The BMT Tax Depreciation Schedule can include separate reports where multiple entities or tenants control different assets or have different acquisition dates. Using industry specific legislation, a specialist will assess the property to ensure every deduction is uncovered and maximised. This includes any fit-out installed or assets removed during an upgrade or renovation. It can also include new amenities like bathrooms, kitchens, accessible parking and security, which be an effective way to add value to the property and secure top-end tenants. In the case of a residential strata complex, all common property items where legislation allows, will be considered when the depreciation schedule is compiled. It is therefore important to keep a record of any documentation related to the purchase agreement and subsequent changes that may have been made to the strata agreement. 3. Tailor your schedule to your investment strategy Plant and equipment depreciation can be claimed using different methods. Determining a property investment strategy at the outset of the property journey, will impact the depreciation method chosen. Diminishing value and prime cost are the two methods of calculating property tax depreciation over the life of the property. Both methods claim the same amount of depreciation over time but achieve different short and long-term cash flow outcomes for the investor. You can only choose one of these depreciation methods for the lifetime of your depreciation schedule, so it is important to analyse and compare how this choice will affect cash flow before making a decision. If you purchase a property as a short-term investment with the purpose of selling again in the coming years, the diminishing value method will offer the most deductions in the earlier years of the property’s effective life. The diminishing value method may therefore be a more attractive option for an investor looking for higher depreciation tax deductions over the short term. Alternatively, the prime cost method, also referred to as the straight-line method, offers equal deductions calculated as a percentage of the cost. If a property is purchased as a long-term investment, the prime cost method will return lower, but more consistent deductions in the later years of the life of the property. We always recommend that investors consult with an accountant or financial adviser to discuss their personal circumstances and investment strategy. A BMT Tax Depreciation Schedule includes both the prime cost and diminishing value methods of depreciation to help make an informed decision before claiming. Request a quote today.

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Depreciation and landscaping

BMT team — Sun, 07 Jan 2024 23:21:29 +0000

When it comes to investment property depreciation, people mostly focus on the building and what’s inside, but the outdoors can be depreciable too. It is important to know that not all landscaping is depreciable; there is a difference in how ‘hard’ and ‘soft’ landscaping is treated in terms of depreciation. Hard landscaping, also known as hardscape, is the structural component or hard-surfaced area of the yard and assets. Sheds, retaining walls, outdoor tiles, seating and concrete walkways are examples. Assets such as these hold depreciable value and can be claimed using capital works deductions or plant and equipment depreciation, depending on which category it falls into. Soft landscaping, or softscape, includes the ‘animate’ areas of a landscaped space. Examples are grass, trees, plants and soil. Residential property investors can’t claim depreciation on these assets. Instead, soft landscaping improvements to the property may be included in the property’s cost base, giving the potential to reduce any applicable capital gains tax liability upon sale. Landscaping and construction expenditure explained The ‘act’ of landscaping itself is not tax deductible according to Subsection 43-70(2) of the Income Tax Assessment Act 1997, which says that construction expenditure specifically does not include expenditure on landscaping (or other costs like demolishing existing structures, clearing, levelling and draining). However, if physical capital works assets are purchased as part of a landscaping process, then these items are deductible as capital works assets. Examples of depreciable landscaping assets The following table highlights some of the common capital works depreciable and plant and equipment assets found in a rental property’s landscaping design. These items alone produce a total depreciation deduction of almost $21,000, highlighting how important it is to include outdoors items still eligible for deductions. Case study – Landscaping expenditure Ian’s investment property’s yard is severely damaged and he needs to carry out extensive landscaping works. This includes some earthworks, removal of debris, re-turfing and constructing a new brick retaining wall. Although Ian can’t claim depreciation or include the earthworks, debris removal and turf in his property’s capital expenditure, he may be able to claim these as repairs through his accountant. He can claim capital works deductions on the new retaining wall. This is because the retaining wall constitutes more than earthworks that simply created artificial landscapes. Getting it right with a specialised tax depreciation schedule A tax depreciation schedule is always the best option to ensure maximised and compliant depreciation claims are achieved. BMT site inspectors ensure the legislation is applied to ensure both indoor and outdoor assets are claimed correctly. To learn more about the BMT process, contact the team on 1300 728 726 or visit the BMT website.

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When do you need a depreciation schedule for your rental property?

BMT team — Fri, 05 Jan 2024 17:20:09 +0000

We know that depreciation is the natural wear and tear of property and assets over time. And in good news, investors just like you can claim it as a tax deduction that could result in thousands of dollars back at tax time. What is a tax depreciation schedule and who needs one? A tax depreciation schedule is a document prepared by a specialist quantity surveyor. This schedule outlines every depreciation deduction available throughout the lifetime of the property. If you own a rental property that is eligible for depreciation, you should get a tax depreciation schedule, or at least a depreciation estimate, to help with your decision. This will allow you to claim depreciation deductions each financial year when lodging your tax return, so you pay less tax. When do you need a depreciation schedule? Ideally, you will get a tax depreciation schedule after you make an investment property genuinely available for rent but before the end of the financial year. This is important because depreciation is only available for properties that are genuinely available as a rental. However, you can still obtain a depreciation estimate prior to this so you have a better idea of the likely deductions available. Getting this done before your first tax lodgement after the purchase of the investment property will ensure you can claim depreciation as soon as possible. This will provide a much-needed cash flow boost after your finances take the hit from the upfront costs of purchasing the property. What happens if you get a tax depreciation schedule later? Let’s say you purchased and rented out the property from the start of the 2021/2022 financial year but have only just realised you can claim depreciation. The good news is that it’s not too late to claim back dollars in missed deductions. A tax depreciation schedule will give you the information needed to back-claim missed deductions in a compliant way. How far back the claim can go varies. The schedule always starts from when you purchased the property and the ATO will usually allow you to back-claim for at least two years, sometimes more. The schedule gives figures for your accountant to amend previous tax returns, so you can adjust the taxable income with the applicable depreciation deductions for the given financial year. Do you need a new tax depreciation schedule after a renovation? This answer depends on the nature of the renovation. A substantial renovation can include removing and rebuilding entire parts of a property so it may need a new schedule. A cosmetic renovation like renovating a kitchen, retiling a bathroom or replacing a hot water system will only need an update to the current schedule. BMT Tax Depreciation can easily make updates to their existing schedules to ensure any addition or renovation is included where depreciation is concerned. Now that you know why and when a tax depreciation schedule is needed to maximise cash from your investment property, contact BMT on 1300 728 726 or Request a Quote today.

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Why you need a site inspection for a tax depreciation schedule

BMT team — Wed, 15 Jun 2022 23:35:41 +0000

Most of us wouldn’t purchase a car before seeing it or exchange unconditional contracts for a property without a building and pest inspection. We believe the same applies to site inspections when preparing a tax depreciation schedule. Property depreciation can save you thousands, sometimes tens of thousands, each financial year. A tax depreciation schedule holds the key to unlocking this cash flow. Your schedule lasts the lifetime of the property, so it’s important to get it right from the very beginning. In this article we will explore: What is a depreciation site inspection and what does it involve Importance of noticing improvements during a site inspection Maximising claims while maintaining compliance Support from the industry Site inspections make it easier for you Key points A site inspection ensures your depreciation claims are maximised and are compliant Hard-to-find assets are always found during a site inspection Both the AIQS and NTAA support the requirement of site inspections. What is a depreciation site inspection and what does it involve? A site inspection for depreciation purposes is different to other inspections like building or open houses. To complete a site inspection, a specialist needs to enter the property to find all the items that can be depreciated. During the inspection, you will see them documenting the property’s items, taking measurements and photographs and analysing the workmanship. An inspection is especially important if your property was purchased second hand. The site inspector will make note of all plant and equipment assets in the property. Although some of these assets may be impacted by 2017 legislation changes, they can still be included in your capital loss statement. In some scenarios this can be an important component if or when you decide to sell the property or dispose of the assets. More importantly though, a trained specialist will identify additional works that will qualify for depreciation via renovations or additions completed sometime many years ago. Importance of noticing improvements during a site inspection Renovations and additions completed to a property over many years ago can be hard to find and are often missed by the untrained eye. For example, if your investment property originally had a gravel driveway and if anyone concreted the section where cars are parked, it may not seem like a qualifying addition, but that driveway will increase your claim. In this scenario, you wouldn’t be able to claim depreciation on the gravel as it is soft landscaping. But you can still claim capital works deductions on the newly concreted section for up to forty years. A specialist site inspector will identify any renovations completed by the previous owner. This means that if the original structure of the building is too old and ineligible for capital works deductions, you can still reap returns from any recent renovations completed in the last thirty plus years. Data shows that of all the schedules completed by BMT, 66 per cent have been for properties that have undergone some kind of renovation or addition. Maximising claims while maintaining compliance Knowing what to include in a tax depreciation schedule can seem straight forward. You look at the property and include what’s there, easy right? However, a specialist knows what to look for during a site inspection to ensure that your claim is maximised correctly. For example, a ducted air conditioner has division 40 and division 43 components. The ducting needs to be valued separately and added to the capital works deduction while under TR2021/3 the packaged unit is considered plant and equipment and depreciated using its unique effective life. Another example might be properly using immediate deductions that allow the owner to instantly deduct qualifying assets in the year of purchase. While knowing the cost of the asset may appear to be the only thing required to claim the deduction, this isn’t the case. An asset must meet four important steps to be eligible. Support from the industry The Australian Institute of Quantity Surveyors (AIQS) is the peak professional standards body for build environment cost professionals. The National Tax and Accountants’ Association (NTAA) is the representative voice for the tax community. Both the AIQS and NTAA support the requirement of site inspections. They know that when site inspections aren’t completed, deductions are missed, and costly errors are made. Some of the most common errors that happen is incorrectly claiming capital works deductions and misusing depreciation incentives such as the immediate deduction. When errors such as these are made, you can come under Australian Taxation Office scrutiny. Site inspections make it easier for you As a property investor, you are already juggling many things from work to tracking your cash flow to mapping out your future investment strategy. When a site inspection isn’t conducted, it means you must do a lot of the heavy lifting, from organising stacks of paperwork to providing the property’s structural information that you have never needed to think about before and not being a specialist yourself things will get missed. A site inspection takes the guess work out of preparing your schedule. BMT Tax Depreciation can make it even easier by organising the inspection directly with your property manager. BMT has been conducting site inspections on properties for over twenty years. A BMT Tax Depreciation Schedule has never failed an audit and is the preferred supplier to thousands of accountants across the country. To learn more about depreciation and how a site inspection can ensure you claim the most from your investment, Request a Quote or call BMT on 1300 728 726.

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TR 97/23 – Repairs and maintenance vs capital improvements

BMT team — Wed, 25 May 2022 06:05:48 +0000

Taxation Ruling TR 97/23, released in December 1997, outlines the tax deductibility of expenses incurred on repairs to premises, plant, machinery, tools and articles. Investment property repairs, maintenance and capital improvements are distinct from each other in the eyes of the Australian Taxation Office, as outlined in TR 97/23. Costs to repair or maintain an investment property can typically be claimed as an immediate tax deduction in the year that the expense was incurred, while capital improvements are not immediately deductible and must be classified as either a capital works deduction or as plant and equipment depreciation. Given that these things are not always clear cut, judgment often needs to be exercised when determining whether something falls under repair, maintenance or capital improvement. This can be difficult, so we provide some simple guidance here. Repair Maintenance Initial repair Capital improvement Answers to common questions Repair Under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 97), repair means ‘the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense).’ For the most part, repair is simply to replace or correct something that has become worn out or dilapidated. It involves restoring to former appearance, form, state or condition without changing character. Works can fairly be described as ‘repairs’ if they are performed to fix: deterioration that has occurred by ordinary wear and tear, or accidental or deliberate damage, or the operation of natural causes (whether expected or unexpected) over time. For example, fixing a crack in plaster would be considered a repair. When determining whether work constitutes repairs, it is important to consider whether the work restores the efficiency of function of the property without changing its character. A minor degree of improvement, addition or alteration can be a repair, however, if substantial, it is not a repair and not deductible under section 25-10 of ITAA 97. According to TR 97/23 ‘renewal, replacement or reconstruction of the entirety (i.e., the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair’. Maintenance According to TR 97/23, if work is in anticipation of, or to prevent, damage or deterioration, it is considered maintenance. Some examples include routine preventative work such as repainting faded walls, maintaining plumbing and deck oiling. Repairs and maintenance often go together, in that repairs will frequently include maintenance work. And some kinds of maintenance work are ‘repairs’ in terms of section 25-10, for example, painting premises to rectify existing deterioration and to prevent further deterioration Initial repair There is also a difference between a ‘repair’ and an ‘initial repair’. While a repair is performed to restore an item, an initial repair is to fix damage which was pre-existing when the property was purchased (whether known to the buyer or otherwise). Initial repairs are of a capital nature, so are not deductible under section 25-10 of ITAA 97. Capital improvement Any works that improve a property beyond its original state are classed as capital improvements. According to TR 97/23, an ‘improvement ‘provides a greater efficiency of function in the property – usually in some existing function. Some indicators that the work performed is an improvement include whether the work will: extend the property’s income-producing ability significantly enhance its saleability or market value, or extend the property’s expected life. A capital improvement will be classified as either a capital works deduction or as plant and equipment depreciation. Capital works deductions Capital works refer to the deductions available for the building’s structure and permanently fixed items. If the property owner is replacing an entire structure that is only partially damaged or is renovating or adding a new structure to the property, it is likely to be capital works. The rate of deduction for capital works is typically 2.5% per year for 40 years from the date of construction. An increased rate of 4% can be used for some property types. Plant and equipment depreciation Plant and equipment assets are items which are mechanical in nature or can be easily removed from the property. If the property owner is installing a brand-new asset such as an appliance, curtains or floor covering, then it is likely to be a depreciating asset. Each asset’s condition, quality and effective life determine the allowances available. Plant and equipment assets can be depreciated using either the diminishing value or prime cost method. Example Let’s consider the example of a rental property that is undergoing a kitchen renovation. Retiling splashbacks and installing a new marble benchtop would be deemed as capital improvements and be claimed as capital works deductions at a rate of 2.5 per cent over 40 years. A new rangehood would be claimed as a plant and equipment asset and be deducted based on the asset’s effective life. If the rangehood was purchased and installed for less than $300 it would be 100 per cent tax deductible in the year the expense was incurred. And if a crack in a cabinet was fixed, it would be considered a repair as a damaged asset is being restored. The expenses involved would then be claimed as an immediate deduction. Answers to common questions How can I tell if the work constitutes a repair, maintenance or capital improvement? It can get complicated when work falls under more than one category. For example, repair work doesn’t stop being a ‘repair’ if it is also maintenance i.e. the work is performed to prevent – or in anticipation of – defects, damage or deterioration. Repairs can also take place at the same time as capital improvements. The best rule of thumb when determining something is a repair, is to consider whether the work restores the efficiency or function of the property without changing its character. As mentioned previously, a minor degree of improvement can still be a repair, but if the change is substantial it is not a repair and therefore not deductible under section […]

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The effective life of commercial depreciating assets

BMT team — Fri, 13 May 2022 07:05:20 +0000

Plant and equipment assets are given an ‘effective life’ to work out their decline in value for tax depreciation. In both residential and commercial properties, different plant and equipment assets that perform the same task may have different effective lives. For instance, the effective life of carpet is 8 years while for floating timber flooring it is 15 years. BMT Tax Depreciation often work with the Australian Taxation Office (ATO) setting and adjusting the effective lives of plant and equipment (Division 40) assets. But in commercial properties, the same type of plant and equipment asset can have a different effective life across various industries. For instance, the effective life of carpet in a retail store is 8 years whereas it is 5 years in a café. Here, we outline some of the differences in the effective life of commercial depreciating assets across industries. What is property depreciation? What is an effective life? Air filtration systems Blowers Excavators Hot water systems Water tanks What is property depreciation? Depreciation is a tax deduction claimed for the natural wear and tear of an income-producing building and its assets over time. There are two types of deductions. Capital works deductions (Division 43) are the building’s structure and items that are permanently fixed to the property. Plant and equipment depreciation (Division 40) are items in which are easily removable from the property or are mechanical in nature. Claiming capital works deductions is relatively straightforward. Capital works deductions can be claimed at a constant annual rate based on the historical cost to build the property excluding plant and equipment. Calculating plant and equipment depreciation is more complex. Each asset’s condition, quality and ‘effective life’ determine the allowances available. What is an effective life? The effective life of an asset, as deemed by the Australian Taxation Office, is how long the asset can be used to produce income. Assets that perform similar jobs can have different effective lives, such as the example of carpet and floating floorboards mentioned previously. Where things get more complex is when assets that perform the same job have a different effective life in one commercial industry compared to another. The reason for this is the effective life of a fixture or fitting can be impacted by frequency, intensity level and purpose for which it’s used. Here are some examples: Air filtration systems Air filtration systems have different effective lives in pharmaceutical manufacturing and sewerage services. An air filtration system required to perform in pharmaceutical manufacturing would need to be at a medical grade level to filter the air from the substances used for pharmaceutical production, which results in a shorter effective life. Sewerage and drainage services, while still important, wouldn’t need to filter such strong substances that can cause greater wear and tear on the air filtration system, resulting in a longer effective life. Blowers From this table, blowers have an average effective life of 15-20 years. In the industries where a blower is used more often, the effective life is shorter. In waste treatment and disposal services the effective life is 7.5 years, which could be due to the asset being used significantly more and for heavier or denser substances. Excavators Determining the effective life of an excavator can be difficult due to the various factors that impact the outcome. These factors include more obvious components such as size, industry and weight of the load. But also, less obvious factors such as the type of excavation being undergone can result in different depreciation rates. Similarly, to the previous assets, we can see how in a neighbouring industry of waste remediation and materials recovery there is a five-year effective life for an excavator. This is considerably shorter than other industries. This may also be due to the substances within the load damaging the asset quicker along with weight and frequency of use. Hot water systems There is a two-year difference in the effective lives of hot water systems across industries. Water tanks Water tanks are one asset with very varied effective lives across industries. Many factors can impact this, such as the material of the tank, the size and especially what it’s used for. If a water tank is only used for fire prevention, then it will have a shorter effective life than one used for water supply. This is due to the high level of structure and efficiency required for a fire prevention asset. Temporary full expensing The temporary full expensing policy is available for businesses with an aggravated turnover of less than five billion to claim the full cost of eligible plant and equipment assets purchased between 7.30pm on 6 October 2020 and 30 June 2023. For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets. There is no capped limit on the number of assets that can be claimed under full expensing. Assets first used or installed ready for use from 12 March 2020 until 30 June 2021 and purchased by 31 December 2020 are eligible for instant asset write-off, with a threshold of $150, 000 and covers businesses with an aggregated turnover of less than $500 million. The backing business investment measure has also been introduced to support business investment and economic growth by accelerating depreciation deductions, business with an aggregated turnover of less than $500 million are eligible. Assets eligible for this policy must be new, first held on 12 March 2020 until 30 June 2021 and not applied in the temporary full expensing or instant write-off rules. Understanding commercial depreciation can be tricky, but luckily BMT Tax Depreciation know all the ins and outs. To learn more about depreciation across different industries, contact BMT on 1300 728 726 or Request a Quote.

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9 tax depreciation facts every investor needs to know

BMT team — Thu, 14 Apr 2022 00:28:49 +0000

BMT Tax Depreciation has prepared over 700,000 schedules and found clients an average of $9,000 in the first full financial year deductions. However, BMT’s research shows that up to 80 per cent of property investors still fail to take full advantage of claiming tax depreciation. When it comes to managing a property portfolio and claiming all the right deductions there is an overwhelming amount of information. So, we thought we’d break down 9 tax depreciation facts. Fact 1. Tax depreciation is the highest non-cash deduction Fact 2. Two types of property depreciation deductions Fact 3. Legislation changes don’t affect capital works claims Fact 4. Legislation changes don’t affect substantially renovated property Fact 5. The immediate deduction boosts cash flow Fact 6. New and old properties hold depreciation Fact 7. Low-value pooling accelerates depreciation Fact 8. Hidden deductions are found in common property Fact 9. Site inspections are a key to step to maximising compliant claims Fact 1. Tax depreciation is the highest non-cash deduction Tax depreciation is a non-cash deduction, meaning investors don’t need to spend any money in order to claim it. Overall, property depreciation is the second-highest deduction available for property investors. Tax depreciation comes second only to costly mortgage interest repayments. Fact 2. Two types of property depreciation deductions There are two types of depreciation deductions available to claim. The first type is capital works (Division 43). This is the building’s structure and the assets that are permanently fixed to the property. These assets can include garages, fences, and built-in kitchen cupboards. On average, capital works deductions make up 85 to 90 per cent of the total depreciation claim. The second type of depreciation is plant and equipment (Division 40). These assets are easily removable from the property or are mechanical in nature. This can include blinds and curtains, light fittings and security systems. While these typically are less than capital works, they still hold significant deductions. Due to legislative changes, there have been adjustments to how plant and equipment deductions can be claimed on second-hand properties, further explained below. Fact 3. Legislation changes don’t affect capital works claims In 2017 the Australian Government made changes to depreciation legislation. The changes meant that owners of second-hand properties purchased after 9 May 2017 could no longer claim depreciation on previously used plant and equipment assets. Investors could still claim plant and equipment deductions on new assets purchased for the property. It’s important to note the legislation changes don’t impact eligibility to claim depreciation deductions for qualifying capital works. Fact 4. Legislation changes don’t affect substantially renovated property A property is considered substantially renovated when all, or substantially all of a building is removed or replaced. Some key examples of substantial renovations include replacing foundations of the building, walls, floors, roof or staircases. If an investor purchases a second-hand property directly after its substantial renovation, the 2017 legislation changes do not apply. This means the new owner is eligible to claim on all new plant and equipment assets and the capital works. Fact 5. The immediate deduction boosts cash flow Investors can further boost their cash flow by claiming the immediate deduction on eligible assets valued up to $300. This immediate deduction can be claimed in the year of purchase and there’s no limit to the amount of assets that can be claimed. This means that if they are eligible, the investor can potentially boost their cash flow by hundreds if not thousands of dollars. Fact 6. New and old properties hold depreciation There is a common misconception that older properties cannot hold depreciation deductions, which is false. Deductions can be found in most properties, from brand new properties to properties built over twenty years ago. Unfortunately, many investors rule out claiming depreciation as they believe their property is too old. An obligation-free tax depreciation estimate from BMT can provide the answer. BMT also guarantees to find double their fee in deductions in the first full financial year or they won’t charge for their services. Fact 7. Low-value pooling accelerates depreciation Low-value assets that aren’t eligible for the immediate deduction are often placed in the low-value pool. Low-value pooling allows owners to claim depreciation at an accelerated rate. When a plant and equipment item is allocated to the low-value pool, it can be depreciated at a rate of 18.75 per cent in the first year and 37.5 per cent each following year. An item can only be included in the low-value pool if it is a low-cost or low-value asset. Low-cost asset: opening value of $1,000 or more. Low-value asset: a written down value of $1,000 or more. When an asset’s opening value was more than $1,000 but the residual value is now less than $1,000. Fact 8. Hidden deductions are found in common property When an investor purchases a property such as an apartment or townhouse in a complex, it will often be under a strata title. Owners of these properties can claim an apportioned deduction of the common property assets under the strata. These may include elevators, intercom systems and ventilation fans. BMT’s specialist site inspectors determine the value of these assets for depreciation purposes by defining the owner’s interest in the asset. Due to depreciation only being available for a portion of the asset, it may fall into the low-value pool or will qualify for an immediate deduction. Fact 9. Site inspections are a key to step to maximising compliant claims Both the National Tax and Accountants’ Association (NTAA) and the Australian Institute of Quantity Surveyors (AIQS) recognise that physical site inspections are essential for claiming maximum deductions compliantly. Failing to conduct site inspections often results in missed deductions or errors made on the tax depreciation schedule. BMT’s specialist site inspectors conduct physical site inspections, ensuring an accurate tax depreciation schedule is completed that maximises deductions and is ATO compliant. For over twenty years, BMT Tax Depreciation has been the most trusted specialist in the industry nationwide. To learn more about how you can start […]

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Do you know how to depreciate rental property improvements correctly?

BMT team — Thu, 18 Nov 2021 22:35:23 +0000

Making improvements is all part of owning a property, whether it be a home or an investment. The difference with making an improvement to an investment property is that it can result in higher rental returns and depreciation deductions. But do you know how to depreciate rental property improvements? And what is involved in doing so? Understanding difference between improvement and repair Before we get into the nitty-gritty of how to depreciate rental property improvements, it’s imperative to understand the difference between improvements and repairs as they are claimed differently. An improvement is improving beyond what was there to start with, while a repair is bringing back what was there. A repair can be claimed as an instant deduction while an improvement must be depreciated. Differentiating between the two is considered on a case-by-case basis and an accountant will look at a number of factors such as the asset installed, what was there before, the costs and the reasoning for the repair or improvement. For example, replacing linoleum flooring with brand-new carpet would be considered an improvement as you’re replacing the previous asset with a new, higher quality one. But if you instead just replaced part of the linoleum floor with similar flooring it could be classed as a repair. How to depreciate rental property improvements How this is done depends on the type of improvement and what category of depreciation the improvement, or parts of it, fall under. If the improvement is structural in nature or involves installing fixed assets like kitchen benchtops, tiles and doorknobs, then it needs to be depreciated using capital works deductions. Capital works depreciate at a rate of 2.5 per cent per year for residential properties. This means a capital works renovation can produce valuable depreciation deductions for forty years. But if the improvement includes easily removable or mechanical assets, then plant and equipment depreciation deductions must be used. These work differently as every plant and equipment asset has a designated effective life, so they depreciate at different rates based on the depreciable lifetime they are given. Before any renovation an investor must remember that there are 2017 legislation changes in place that impact depreciation available on plant and equipment assets. It means that any second-hand plant and equipment asset purchased and installed after 9 May 2017 are ineligible for depreciation. Therefore, those looking to take full advantage of depreciation should avoid installing a second-hand plant and equipment asset during a renovation. Some plant and equipment assets may also qualify for special incentives. One of these is the immediate write-off, where new assets that cost less than $300 can be claimed as an instant tax deduction rather than depreciated over time. The second incentive on offer is the low-value pool. This allows new assets that are installed during an improvement to be depreciated at an accelerated rate if they are valued at less than $1,000. It’s also important to remember that anything removed during a renovation can be ‘scrapped’. This means any undeducted depreciable value of a removed asset or structure can be claimed as an instant deduction in the same financial year. Now that we know how an improvement depreciates, how can it be claimed as a tax deduction? The key to claiming this depreciation on property improvements is to use a tax depreciation schedule. This essential report outlines every single depreciation deduction claimable from the rental property. An accountant uses this schedule at tax time each year to determine the depreciation deduction to reduce the financial year’s taxable income. What happens if an improvement is made after a tax depreciation schedule has already been prepared? Rental property improvements are made for a variety of reasons. One could be made due to damage or damage prevention, or simply a renovation to improve the rental return of the property. Whatever the case, the good news for investors that have an existing schedule with BMT is that it’s easy to make amendments to a current schedule to ensure the improvement and its assets are included. Now that you know how to depreciate rental property improvements and what’s needed to do so, contact BMT today on 1300 728 726 or Request a Quote.

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What is the straight-line method of depreciation?

BMT team — Wed, 01 Sep 2021 06:17:19 +0000

Tax depreciation is a complex topic, with different factors contributing to how and when it can be claimed. The straight-line method of depreciation is just one approach to claiming depreciation. But what is it and how does it maximise cash? What is depreciation? Before we start talking about the straight-line method, let’s first explore depreciation. Property and assets experience natural wear and tear over their lifetimes – they depreciate. Owners of income-producing properties can claim this depreciation on eligible assets each financial year as a tax deduction. Depreciation can be claimed on either capital works or plant and equipment assets. Capital works is claimed on the structure of the building and fixed assets like door handles, windows, fences and built-in cupboards. Plant and equipment assets are those that are easily removable or mechanical in nature such as furniture, air-conditioning units, window coverings and light fittings. Depreciation works like any other tax deduction. It reduces an investor’s income, so they pay less tax. But the major perk is that unlike any other investment property tax deductions, no money needs to be spent to claim depreciation. What is the straight-line method of depreciation? So, how much depreciation can be claimed? This depends on the asset type, value and the method of depreciation that is chosen. Capital works depreciate at a set rate of 2.5 per cent over forty years. For example, a built-in wardrobe valued at $2,600 would produce a full year depreciation deduction of $65. It works differently for plant and equipment assets. Every plant and equipment asset has its own effective life, which determines the rate it depreciates using one of two methods. The first is the diminishing value method, and the second is the prime cost method – also known as the ‘straight-line method’ of depreciation. The diminishing value method calculates deductions as a percentage of the asset’s depreciable balance. This means deductions are higher in earlier years. The prime cost method calculates deductions each year as a percentage of the asset’s cost. The result is that deductions are spread out over time with a more even claim each financial year, forming a straight line over time. The equation for the prime cost (straight line) method, as defined by the Australian Taxation Office, is as follows: Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life) For example, carpet has an effective life of eight years resulting in a prime cost depreciation rate of 12.5 per cent. This means carpet valued at $5,000 would produce a full financial year depreciation deduction of $625. Below are visual representations of the straight-line method applied to carpet depreciation. Who should consider using the straight-line method of depreciation? Investors can choose to depreciate a plant and equipment asset using either the diminishing value or prime cost (straight line) method. Once a method is chosen for an asset, it can’t be changed. The vast majority of investors choose the diminishing value method of depreciation as it results in higher deductions in earlier years. However, the choice should always come down to an investor’s investment strategy. For example, the prime cost method may be more suitable for a long-term investment strategy as it produces consistent deduction each financial year. Who can assist when deciding which method of depreciation to use? The depreciation experts at BMT Tax Depreciation know how to correctly apply all methods of depreciation. A BMT Tax Depreciation Schedule shows the deductions available using both diminishing value and prime cost (straight line) methods of depreciation. This way an investor can go over their schedule with their accountant to help determine the best method to use for their plant and equipment assets. To learn more about depreciation and how a BMT Tax Depreciation Schedule can ensure you choose the best method for your investment strategy, Request a Quote or contact the team on 1300 728 726.

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