Understanding how you can benefit from tax depreciation is a simple as owning a car. If you bought a new car, you will understand that every year it depreciates in value. The same principle applies to property, except you can use this to your advantage.
Blogger: Paul Bennion, DEPPRO tax depreciation specialists
If a property is being used for investment purposes, the Australian Tax Offices allows the investor to claim the decline in value of the building by way of a tax deduction.
The amount that can be deducted depends on the age and value of the building but it is varies between 2.5% to 4% of the capital works value of the building each year.
An investor can claim these tax benefits by using the services of the tax depreciation specialist called who prepares a tax depreciation schedule.
A depreciation schedule is a report undertaken by a quantity surveyor company (such as DEPPRO). It generally should be undertaken when the investor buys the property.
A Quantity Surveyor, also known as a Construction Economist, or Cost Manager, is one of a team of professional advisors to the construction industry. As advisor, they estimate and monitor construction costs, from the feasibility stage of the project through to the completion of the constructed period. After construction they prepare tax depreciation schedules for property tax depreciation purposes.
The quantity surveyor produces a tax depreciation schedule for clients which is a physical snap shot of the property.
For example, DEPPRO sends out a staff member to the client’s property and they fill in a report and take pictures of the property to estimate depreciation benefits.
This depreciation report itemises the age of the property, what materials it is built from, the internal fittings such as carpets, window treatments, appliances etc. An estimated value is placed against these various items and they are depreciated depending on their age and value.
The investor gives this report to their accountant and this is used by them to work out how much tax benefits they can obtain each year.
You only need to do one depreciation report for a property and it can be updated each year by the accountant if the investor for example, installs a new kitchen.
The cost of a depreciation report as prepared by DEPPRO is around $600 and this is tax deductable.
The financial benefits of such a depreciation report can be large especially for new properties which could be up to $10,000 each year. Collectively, the value of the tax deductions for property investors throughout Australian can run into hundreds of millions of dollars.
As a rule of thumb, tax depreciations benefits can be equivalent to around 60% of the annual rental income of an investment property.
Most properties regardless of their age can offer investors substantial tax benefits through obtaining such a schedule.
That is why it is important that you undertake a tax depreciation schedule as soon as possible after the settlement date of your purchase because if you undertake renovations, an tax depreciation schedule will ensure that you can claim all tax benefits through physical improvements to the building.
This is why undertaking a tax depreciation report is particularly important for the growing number of property investors in Australia who are buying properties for renovations purposes.
Australia’s love affair with home renovations is underlined by the fact the nationally we are now spending over $100 million every week on renovating properties.
DEPPRO is finding that property investors are now leading the charge in home renovations due to rising rental returns and low interest rates.
Overall, DEPPRO recorded a 30% jump in the number of tax depreciation reports we have undertaken during the last year for investors planning to undertake major home renovations.
In many capital cities throughout Australia, property investors are now achieving rental returns in excess of 5%.
Astute investors are taking advantage of very competitive house prices to purchase older style homes in well located areas where they can significantly boost rental returns through renovations and with this increased cash flow purchase additional investment properties.
However, DEPPRO is finding that many investors still do not understand that they can qualify for significant tax benefits when undertaking a home renovation on their investment property.
DEPPRO is finding that common refurbishments to these investment properties include renovations to kitchens and bathrooms, which account for around 60% of the budget, with the remaining 40% being spent on lounge, family and bedrooms which would include floor coverings and repainting.
Many investors throw out many items without understanding that they may claim tax benefits on these materials at 100% of its written down value in the year of disposal.
A typical amount spent on a home renovation ranges from $20,000 to $50,000 for a basic refurbishment and the investor can qualify for both plant and capital works allowance as a tax deduction and the residual write off of the disposed item.
However, to qualify for these tax benefits, the investors have to undertake a depreciation report for the property as near as to the date of purchase as possible.
If you don’t obtain a tax depreciation report then you cannot claim for these substantial tax benefits as the Australian Tax Office requires such as report to ensure that the investor is making legitimate claims.
To protect their interests and ensure that they select a company that is fully compliant with ATO rulings, members of the public should select a company that is a member of The Australian Institute of Quantity Surveyors (AIQS).
AIQS is the professional standards body for quantity surveyors throughout Australia and enjoys a close working relationship with the ATO.
Over recent years AIQS has worked with the ATO on the review and revision of the requirements for investment/rental property depreciation reporting.
DEPPRO is an Associate Member of AIQS and uses systems that are fully compliant with ATO rulings.
Unfortunately, there are many businesses in the industry that do not have the qualifications and experience to ensure property investors receive quality information.
Over the past number of years, the ATO has spent a lot of time removing ambiguities from the legislation dealing with depreciation on residential properties.
As a part of this process, the ATO consulted with professional bodies such as AIQS and also ensured they were kept informed about of changes and requirements, for which they should be complemented. AIQS has played a critical role in conveying the ATO’s message to its quantity surveying members.
For depreciation professionals, having the appropriate training and qualifications and being a member of organisations such as the AIQS is critical in ensuring you can provide the best advice for your clients.”
Without it, it is impossible to keep up-to-date with legislative requirements. Companies whose representatives are not members of AIQS are also not bound by any Code of Professional Conduct.
Property investors should be wary of companies who are not members of AIQS and employ salesmen or women touting catch phrases and a more dubious approach to providing advice in relation to tax depreciation entitlements.
In many cases these companies probably do not even complete the depreciation schedules but out-source the work to others who do not even see the property and simply apply a one-size-fits-all approach to preparing it.