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It’s that time of year again where television advertisements start battering us with acronyms like ‘EOFYS’ and shoeboxes of receipts are clutched in trembling hands gripped by the terror of a looming tax return. Whilst fear and dread might be the default emotions for many at this time of year, for property investors it’s a rare chance to claw back some hard earned capital from the obdurate tax man.
Blogger: Mike Mortlock, MCG Quantity Surveyors
To that end we’ve put together a snappy list of 4 things you should know about depreciation this tax season.
1. If you've only just purchased a property, don’t put off getting a depreciation schedule
The upcoming end of financial year presents a great opportunity for quantity surveyors to say things like “We achieved $2,000 worth of deductions in 10 days! That’s $200 a day!”
Is this just marketing spin? Are we talking about a 10 million dollar unit? The short answer is no. There exists tax legislation such as 100% deductions which allows you to write off 100% of the value of a depreciable asset worth $300 or less in the year of acquisition. So if there’s only one day of claim in that financial year, you still get the full value! There might be a number of these low value assets in your property such as bathroom accessories, ceiling fans, door closers, smoke alarms and maybe more.
Last year we highlighted an exceptionally average property that returned over $3,000 worth of depreciation deductions in 59 days. You can read the whole article here.
There’s also low value & low cost pooling legislation which allows for an 18.75% deduction in the year of acquisition. Yet another arrow in the quiver of the skilled depreciation expert hell bent on maximising your claims.
2. Chances are that even your 1960s built property will have some significant depreciation deductions
We feel a bit like a broken record, but we don’t mind repeating ourselves if it puts money in our clients pockets. So here goes once more. ‘A phone call will cost you nothing, but not making it could cost you thousands.’
By speaking with a qualified Quantity Surveyor, you’ll be able to receive a fair appraisal of the kind of depreciation deductions that might be available. Many investors own property which they don't believe is likely to have any depreciation deductions available. However, this is simply not true more often than not. Even properties constructed in the 1960s are likely to have significant depreciation deductions available. After all, there are plenty of 1960s properties in Australia, but how many of them still have their original 1960s kitchen and bathroom? It doesn't matter if you've made no improvements to the property yourself as renovations completed through the previous owners toil will attract depreciation deductions that you're entitled to claim. If the kitchen has been updated, or the bathroom has been re-tiled, or it's had a coat of paint there'll be something there for you to claim.
3. If you've never claimed depreciation, you might have a hefty back claim
If you purchased your investment property a few years ago and you've never had a depreciation schedule, we’re sorry! We’ve been educating investors for years to have a depreciation schedule completed straight away, but sometimes it’s hard to stand out above the ardent bubble prophets and the real estate bulls on the other side of the fence. We either did not reach you to implore you to have one done, you stubbornly went your own way, or quite simply forgot. Chances are you’ve may have missed out on some deductions. The bad news here is that investors in the past were able to access up to four financial years of back claim, but that has changed to two financial years. However, those two financial years can certainly add up. We've had residential property investors with back claims over $15,000 and commercial property owners with back claims that would have accountants trembling at the knees. The good news is that depreciation reports start at the settlement date and show any depreciation claims for previous financial years you may be entitled to. Some investors have been able to receive rulings from the tax office allowing them to amend several years of claims. This allows investors to access their full back claims. Be sure to talk to an accountant with specialist investment property knowledge to ensure you're not missing out.
4. Make sure to itemise your repairs and maintenance costs to maximise your deductions
At this time of year we're inundated with carefully itemised spreadsheets from property investors showing us what they've spent money on, and we love it. There might be hot water system repairs, touch up paint jobs, new driveways, light globes and a multitude of other improvements mixed in. Not all of the items listed in the above example are treated the same way. Taking those items as examples, the new driveway is considered a capital improvement, or division 43. This means it will depreciate at 2.5% of its value each financial year for 40 years. Things like hot water system repairs and touch up painting are more likely to be considered as repairs and maintenance. This distinction is important because repairs and maintenance expenditure can be claimed by your accountant at 100%. If the works are a capital improvement, it will depreciate at 2.5% over 40 years. Why wait 40 years to claim the full value when you can do it in one?
When we see these spreadsheets we highlight the items we consider to be repairs and maintenance and send them through to the investor's accountant. The accountants are always happy to have these costs itemised for them and it certainly saves them time going through the spreadsheet again themselves.
To replay the record we broke earlier, the best advice we can give at tax time is that a phone call or email costs nothing. If you're not sure what your entitlements are or whether it is worthwhile having a report prepared, with a few simple questions we can give you a good idea how worthwhile a depreciation schedule might be.
About Mike Mortlock
Mike Mortlock is a Quantity Surveyor and Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at www.mcgqs.com.au