Maximise cash flow with immediate deductions
Immediate deductions available for non-business residential assets
Residential property investors that claim the most depreciation do so by using a specialist quantity surveyor. A specialist will use every appropriate rule available to increase deductions and improve the owner’s cash return.
The immediate deduction is one of the most utilised depreciation rules that is often misused due to its complexity. It allows investors to claim 100 per cent of an asset costing less than $300 in the year of purchase.
The complexity of the immediate deduction
This immediate deduction can save investors hundreds, if not thousands, of dollars. However, there are four important rules that qualify an asset for the extra claim.
1. It must be a stand-alone asset
Individual assets that are part of a set aren’t eligible for the immediate deduction if the total set cost exceeds $300.
A quantity surveyor will determine whether assets are a set on a case-by-case basis. The following example demonstrates how set determination works in practice.
Connor owns a fully furnished rental property and purchased a new single bed and mattress for one of the bedrooms. He purchased the bedframe for $150 and the mattress for $250. While they are two individual items, they are considered as part of a set and are designed to be used together. Connor can’t claim the immediate deduction as the set total exceeds $300.
2. It must not be one of several identical or substantially identical items
The total cost of an asset and any other identical or substantially identical assets that an investor purchases in an income year must not exceed $300.
A specialist quantity surveyor considers many factors when determining if an asset is substantially identical to others including the purpose, colour, shape, function, brand and design. The following example demonstrates how this works in practice.
Jane owns a student share house that consists of five furnished bedrooms. During the 2019/20 financial year, Jane purchased brand-new student desks for all five bedrooms. Each desk was different in colour but of the same design and purchased from the same provider.
The desks cost $200 each. However, Jane can’t claim the immediate because they are substantially identical, and the total cost exceeds $300.
3. It must cost $300 or less
The cut off for residential property investors is $300 or less. It is important to know where an asset is jointly owned by several individuals, some members can claim the immediate deduction based on their interest. The following demonstrates how this works.
Mel and John own an investment property in the proportions of 70 and 30 per cent. Based on their respective interests, they contribute $490 and $210 to purchase a new cooktop. Only John can claim an immediate deduction because his interest in the asset doesn’t exceed $300.
4. It is used mainly to produce non-business assessable income
To claim the immediate deduction, an investor must use the eligible asset more than 50 per cent of the time for producing non-business assessable income.
It’s important to note that if an investor meets this test and uses the asset for non-taxable purposes, such as private use, the immediate deduction must be apportioned appropriately.
Claiming depreciation on assets ineligible for the immediate deduction
If a residential investor can’t claim the immediate deduction, the deduction will be determined using the general rules of depreciation. Alternatively, an investor may choose to allocate the asset to a low-value pool.
Assets with a value less than $1,000 can be deducted using a low-value pool, allowing the asset to depreciate at an accelerated rate.
This can also apply if an asset was eligible for an immediate deduction in the purchase year but, for a variety of reasons, was not claimed.
In this instance, an asset that would’ve qualified for the immediate deduction in the purchase year can instead be claimed using the low-value pool or effective life rates.
To learn more about the immediate deduction of assets, contact BMT on 1300 728 726 or Request a Quote.