Smart investment strategy is not just about capital growth and high rental yields; it’s also about improving cash flow. This month, Tyron Hyde begins a countdown of the top 10 depreciation tips for maximising cash flow
Claiming depreciation on your property is one of the most important steps in an investor’s journey. And it’s the only deduction that can be subjective. All other expenses, including interest, strata fees etc must equal precisely the amount paid out. Here are the first five of my Top 10 tips on how to make the most of your depreciation opportunities:
Number 10: Use an experienced Quantity Surveyor
For starters, let’s put this issue in perspective: You have just paid hundreds of thousands of dollars for a property. Do you really want to save a couple of hundred tax-deductible dollars on the only tax break available to you that can be open to interpretation and skill?
The ATO has identified quantity surveyors as being appropriately qualified to estimate original construction costs where the figure is unknown. I suggest you engage a firm that has been around for at least 10 years. They will have the experience needed to analyse your property correctly. The laws have also changed frequently over the years and each building is unique, so it pays to get expert advice. The ATO requires all companies who prepare Tax Depreciation Schedules to be registered Tax Agents.
Number 9: Avoid properties with a 4pc Building Allowance
Residential properties built between 18 July 1985 and 15 September 1987 attract a 4 per cent building depreciation rate over 25 years. Properties built since then attract a 2.5 per cent rate over 40 years. So, if you buy a property for which construction commenced between 1985 and 1987, the maximum claim on the building allowance will be until 15 September 2012. However, if you buy a property for which construction commenced, for example, in 1992, you still have 20 years’ depreciation at 2.5 per cent. That’s 5 per cent of the original construction still left to claim.
Number 8: Furnish your property
Furnishing your property is another way to increase your depreciation deductions as it will attract higher depreciation rates. For example, a $20,000 furniture package supplied by a developer can provide a $10,000 deduction in the first year alone. But remember, furnishing your investment isn’t necessarily the best option for all properties and locations. It’s better suited to smaller one or two bedroom apartments in transient areas that attract short-term tenants and holiday rentals.
Number 7: Claiming the Residual Value Write Off
I believe investors will miss out on millions of dollars’ worth of depreciation claims in coming years due to changes in the definition of ‘plant and equipment’. When I first started preparing depreciation reports, there were several factors that determined what made the list. These included whether the item was absolutely necessary in order to make the property available to rent out. For instance, a kitchen is an absolute necessity; a microwave wasn’t. If you are renovating a kitchen or bathroom in a property built after 1985, get a quantity surveyor in before you demolish so they can assess the residual value of these items. That value can still be claimed as an outright deduction and can generate huge savings in the first year. For instance, a rental property with a 20 year-old $10,000 kitchen attracts an immediate deduction of around $5,000.00.
Number 6: Don’t bother with DIY depreciation
As a market expert, I am baffled by the number of companies offering a do-it-yourself option. I personally think there are some legal anomalies here, but – more important – I think you will be missing out on some major deductions. Here’s one example: The DIY options on the market give you a tick sheet and ask you to take your own measurements. Now let’s say you measure from one bedroom wall to the other. If you do that all around the house, you would reduce the property’s gross area by 10 per cent. At approximately $1,500 per square metre to build, you would have missed out on something like $15,000 worth of tax deductions!
Tyron Hyde is a director of quantity surveying firm Washington Brown. He has a degree in construction economics and is an associate of the Australian Institute of Quantity Surveyors