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Renovations can be a way of adding to the value of a property, and so a quantity surveyor has identified five renovation options that can potentially save ‘thousands’ come tax time.
Mike Mortlock, managing director of MCG Quality Surveyors said investors could find themselves saving more money by being more strategic when renovating and doing their DIY work.
“I’ve run scenarios which show investors can create added thousands in tax deductions on a renovation simply by selecting one item or finish over another,” Mr Mortlock said.
“The idea of using a depreciation schedule to minimise tax is nothing new.
“However, by understanding what items create the most tax-effective benefits, you can make smarter choices that will add thousands to your result without having to outlay a penny more in costs.”
Investors should note the rules around what you can and can't claim on investment properties have changed in recent years. For a full update, visit the ATO's website.
If an investor is looking to renovate one room of a house, focusing on the kitchen area can improve tax prospects, Mr Mortlock claimed, more than that of a bathroom.
“Kitchen renovations attract higher depreciation rates than bathrooms because of the sheer quantity of assets defined as plant and equipment items – the very things that depreciate fastest under the ATO (Australian Taxation Office) guidelines,” he said.
Mr Mortlock added that there are more options for plant and equipment in a kitchen, such as appliances, while bathrooms have limited items available.
“I’ve run some typical numbers based on a $20,000 renovation and choosing to spend up in the kitchen instead of the bathroom can result in an additional $2,000 in deductions across the first three years.”
Mr Mortlock identified that even floor finishes could offer greater tax advantages to investors than other kinds, with his picks being carpet and floating timber.
He claimed that the ATO views carpet as having a 10-year life and floating timber as 15 and are both considered to be plant and equipment, while tile and concrete have 40 years and are considered part of the structure.
“This means different rules apply which results in carpet classed as depreciating by 20 per cent per year and floating timber at 13.3 per cent,” Mr Mortlock said.
“In comparison, tile and concrete receive a simple 2.5 per cent depreciation rate each year.
“So, $1,000 of carpet can give you $200 worth of deductions in year one, while tile only allows $25 per annum.”
Individual plant items that have an opening value below $301 are eligible to be an instant deduction on tax returns.
“If, for example, you’re considering cost-effective approaches to cooling rooms, ceiling fans could be the way to go,” Mr Mortlock explained.
“If you have one installed for $300 or less, you’ll get a $300 deduction right away.”
“Outdoor spaces that can be upgraded can give property investors the ‘perfect opportunity’ to see an increase in their tax returns,” Mr Mortlock said.
“You might consider making your rental more inviting by including a few little outdoor extras that provide great advantages for maximising rebates,” he said.
“External fridges and barbecues, for example, help improve rental appeal while also providing excellent short-term tax deductions.
“So, while the tenants are cooking up a storm and enjoying a coldie from the fridge, you can be reducing your tax responsibilities and [collecting] a higher rebate cheque.”
In Mr Mortlock’s opinion, one of the cheapest ways to both increase a property’s value as well as take advantage of depreciation is to include window coverings.
“They help with temperature control and filtering light, while also completing the property’s fresh, new look – and they’re a terrific tax deduction too,” he said.
“They can be purchased relatively cheaply and self-installed.
“Best of all, most homes have a lot of windows so the deductable benefits are multiplied.”