As a central point of contact for property investors, Property Managers play a vital role in educating them about the benefits of claiming depreciation deductions.
This often results in them referring landlords to a specialist Quantity Surveyor who will provide a comprehensive tax depreciation schedule outlining what depreciation deductions can be claimed for their property.
Given the Property Manager is entrusting their clients to a third party, they may still receive questions from both landlords and their tenants about what is involved throughout the process of completing the schedule. Property Managers may like to know what steps will be involved so they can reassure their clients along the way and ensure that the depreciation schedule provided is both comprehensive and maximises the investor’s claim.
With this in mind, let’s take a look at what’s involved in the process:
- Pre-purchase estimates
- Initial enquiry
- Confirmation and collection of information
- Site inspection
- Completion of the depreciation schedule
- Providing the schedule to the client and their nominated Accountant
1/ Pre-purchase estimates
An investment property doesn’t have to have been purchased by an owner in order for them to discover its depreciation potential. Specialist Quantity Surveyors can provide tax depreciation estimates for any property listed for sale.
By the same token, if an investor is looking for a Property Manager to find an appropriate tenant and to oversee the rental of a new purchase, a depreciation estimate will be a valuable tool to help secure new listings.
2/ Initial enquiry
It’s recommended that property investors contact a specialist Quantity Surveyor to obtain a depreciation schedule after the settlement of a property. Often investors delay getting a schedule until closer to tax time or wait until the following year because they have only owned the property for a short time.
There are benefits to getting in early. Partial year deductions can be maximised and even if the end of financial year is a long way away, investors can speak with their Accountants about the option of submitting a Pay As You Go (PAYG) withholding variation.
3/ Confirmation and collection of information
Once an investor decides to go ahead and engage a Quantity Surveyor to complete a depreciation schedule, they will collect all of the relevant information about the property required.
This includes the address, suburb and state; the name/s the schedule is to be made out in for tax purposes; the purchase price, land value, settlement date and age of the building; and details if the owner has ever lived in the property.
The Quantity Surveyor will ask whether the property will be rented furnished or unfurnished and if there are any renovations which have been completed prior to or after purchase. Finally, they’ll ask for details of whom to contact in order to arrange a site inspection.
4/ Site inspection
A Quantity Surveyor should always complete a site inspection as part of the process of providing a depreciation schedule, as this allows them to gather sufficient information in order to prepare the report.
The Quantity Surveyor will make it easy for the Property Manager by contacting the tenant on their behalf to arrange the inspection when required. Once a suitable time has been arranged, a depreciation expert will visit the property to take detailed notes, measurements and photographs.
They will use a laser measurer to gather details about room sizes to later help calculate construction costs and the depreciable value of flooring. Photographs will be taken of each individual plant and equipment asset, including curtains, dishwashers, smoke alarms, garbage bins and light fittings to name just a few.
For certain items, for example the rangehood and oven, they’ll note the specific brand. This will help them later to establish the depreciable value of the items. Installation dates on appliances can also be useful, as can information on whether the property operates on gas or electricity and whether the air conditioning is ducted or a split system.
5/ Completion of the depreciation schedule
All information gathered during the site inspection will be used by the Quantity Surveyor to prepare the depreciation schedule.
Sometimes additional research will need to be undertaken, for example contacting local councils for more information about renovations completed by a previous owners contained in a DA approval.
The Quantity Surveyor will then prepare the schedule using depreciation methodology outlined in tax legislation. For any residential property in which construction commenced after the 15th of September 1987, there will be capital works deductions available for the building structure. For properties older than this date, renovations completed within the legislated dates may entitle the owner to capital works deductions too.
Each of the itemised plant and equipment items found during the site inspection will depreciate based on an individual effective life set by the Australian Taxation Office. This is where the accuracy of the information collected is crucial.
The depreciation schedule should take no more than five to seven working days after the initial site inspection to complete.
6/ Providing the schedule to the client and their nominated Accountant
The final step involves sending an electronic or hard copy of the schedule to both the landlord and their nominated Accountant.
The investor can then visit their Accountant who has all the information on hand to include the depreciation claim in the client’s annual income tax assessment.
A schedule should last forty years, with the deductions the owner can claim each year outlined. Deductions will also be provided in both the prime cost and diminishing value method.
Some tenants may not understand, given that the depreciation deductions won’t benefit them and the site inspection may be an inconvenience, but it helps to explain that it is a once off occurrence and that the owner usually requests a schedule because they are looking to benefit from their property for the long term.
For landlords, ultimately the deductions outlined in the schedule will provide valuable additional cash flow which can be used to help maintain the property and complete necessary repairs when required. This can have a flow on affect by helping to keep the tenants happy and encouraging them to stay longer, avoiding vacancy and keeping the rental income flowing.