The Value of Tax Depreciation Schedules for Investment Properties
by Graham Lalor_Taxation Accountant
Making Investment Property Ownership More Affordable by Maximizing Non-Cash Allowable Tax Deductions
Many property investers are losing substantial savings by failing to take full advantage of their property’s tax depreciation potential.
An often overlooked or underutilised method of obtaining important tax savings is through the deduction of the depreciation of fixtures and fittings in an investment property. Another method is the deduction of the cost of the development or construction costs of a property, amortised over 40 years (2.5% per annum), commonly referred to as the 'building allowance'. These two processes are available to any property owner who obtains assessable income by way of rent, or operates a business from the property.
There are usually substantial amounts of money in tax depreciation deductions available to be claimed on any investment property, but generally, the newer the property the more deductions there are to be claimed.
These deductions are claimed on the costs for building structure (Division 43 of the Tax Act), and plant and equipment or fixtures and fittings contained within the property such as carpets, air conditioning, curtains, light fittings, stove, dishwasher, hot water service etc (Division 40 of the Tax Act).
Property investors can potentially turn an after-tax cash loss investment into an after-tax cash positive investment or, at the least, a reduced cash loss investment.
This could improve your cash flow situation and the overall cost of owning an investment property, to the degree that you might be able to afford to purchase another property investment.
What Buildings Qualify for Depreciation Deductions?
- As a general rule, any property that has been either constructed or refurbished after 17 July 1985 (residential) and 20 July 1982 (non-residential) is eligible for the construction write-off allowance.
- All buildings, regardless of age, will attract depreciation on plant and equipment and fixtures and fittings.
- All external works including fencing, paving, pergolas, garden sheds etc constructed after February 1992 will attract the building write-off allowance.
It's important to know that a depreciation report can be prepared to allow a client to easily recover missed depreciation benefits (up to a period of two years) by amending previous tax returns.
When Can You Benefit From these Non-Cash Tax Deductions
Initiation stage of a new building – Depreciation & Building Allowance Estimate
A Quantity Surveyor can provide tax deduction estimates before purchase. This will ensure you are easily able to determine your after-tax cash flow position if you are considering the purchase of a particular property.
The completion of a new building
A comprehensive analysis of a completed building ensures the maximum number of depreciable items is identified and the deduction is maximized, in accordance with Divisions 40 and 43 of the Taxation Act. A comprehensive deduction schedule will ensure full ATO compliance of returns.
The purchase of an existing property
If a cost schedule is not included in the contract of sale documents, a Quantity Surveyor can re-value the items of plant and equipment based on the sale price. A comprehensive analysis of the building ensures all depreciable items are identified and claimed and Division 43 of the Taxation Act is established.
What is a Quantity Surveyor?
A quantity surveyor provides construction cost consultancy services to various individuals and organisations. A quantity surveyor is equipped with construction costing skills that enable them to specialise in pricing building costs. Quantity surveyors provide investors and owners of property, along with real estate agents and accountants, with the following services:
- Capital allowance tax depreciation reports
- Replacement cost estimates
BMT & Associate Quantity Surveyors
The John Hopkins Group uses and highly recommends the services of BMT & Associate Quantity Surveyors (BMT). BMT, amongst other things, are independent specialists in the field of property tax deductions. When BMT are engaged, the client is assured of obtaining the maximum possible deductions from the property while still being ATO compliant.
Important Note
A special discounted fee for John Hopkins clients has been negotiated with BMT to produce depreciation reports. Refer to one of the John Hopkins qualified Financial Advisers or Property Advisers for further details of this offer.
Once the tax depreciation report is produced by BMT it is my job, as the Taxation Accountant, to claim the tax depreciation deductions in the client’s tax return each year.
Working Example
The following example is provided as an approximate guide taking note of the methods we have discussed above to show you the very real benefits that can apply.
Property Cost: $400,000
Income: Rent $385 pw (or approximately $20,000 pa)
Borrowings: $400,000
Interest only loan of $400,000 (at 7.25% pa): $29,000 pa
Rates & management: $4,000 pa
Total expenses: $33,000 pa
Scenario 1 – No Claims for Depreciation or the Building Allowance
Pre Tax Cash Flow – Loss: $13,000 pa ($250 pw)
Tax Refund ($13,000 @ 38.5% tax rate): $5,005 pa
After-Tax Cash Flow ($13,000 - $5,005): $7,995 ($154 pw)
Scenario 2 – With Claims for Depreciation and the Building Allowance
Pre Tax Cash Flow – Loss: $13,000 pa ($250 pw)
Total Tax Deductions: $25,000pa (including $12,000 depreciation & building allowance)
Tax Refund ($25,000 @ 38.5% tax rate): $9,625pa
After-Tax Cash Flow ($13,000 - $9,625) $3,375 ($65 pw)
As you can see, the difference due to the tax depreciation claim is $4,620 per annum ($9,625 less $5,005), or $89 per week, which is substantial.
The investor in Scenario 2 has an additional tax deduction of $12,000, or $4,620 per annum ($89 per week) extra cash, simply by obtaining a depreciation report and claiming tax depreciation.
This extra cash amounts to the following, depending on your marginal tax rate:
- Marginal tax rate of 46.5% - $5,580 per annum ($12,000 @ $0.465), or $107 per week
- Marginal tax rate of 31.5% - $3,780 per annum ($12,000 @ $0.315) or $73 per week
You can see how important these deductions are. Everyone’s circumstances are different, and it’s important for you to go over your own individual position with a Financial Adviser. To book an appointment, contact our Client Liaison Office on 1300 726 082.
For more information, or to arrange an appointment with a John Hopkins Financial Adviser or Taxation Accountant, please contact our Client Liaison Officer on 1300 726 082 or click here.