Research shows that up to 80 per cent of property investors still fail to take full advantage of claiming tax depreciation.
When it comes to managing a property portfolio and claiming all the right deductions there is an overwhelming amount of information.
So, we thought we’d break down 9 tax depreciation facts:
Fact 1. Tax depreciation is the highest non-cash deduction
Tax depreciation is a non-cash deduction, meaning investors don’t need to spend any money in order to claim it.
Overall, property depreciation is the second-highest deduction available for property investors. Tax depreciation comes second only to costly mortgage interest repayments.
Fact 2. Two types of property depreciation deductions
There are two types of depreciation deductions available to claim. The first type is capital works (Division 43). This is the building’s structure and the assets that are permanently fixed to the property. These assets can include garages, fences, and built-in kitchen cupboards. On average, capital works deductions make up 85 to 90 per cent of the total depreciation claim.
The second type of depreciation is plant and equipment (Division 40). These assets are easily removable from the property or are mechanical in nature. This can include blinds and curtains, light fittings and security systems. While these typically are less than capital works, they still hold significant deductions.
Due to legislative changes, there have been adjustments to how plant and equipment deductions can be claimed on second-hand properties, further explained below.
Fact 3. Legislation changes don’t affect capital works claims
In 2017 the Australian Government made changes to depreciation legislation. The changes meant that owners of second-hand properties purchased after 9 May 2017 could no longer claim depreciation on previously used plant and equipment assets. Investors could still claim plant and equipment deductions on new assets purchased for the property.
It’s important to note the legislation changes don’t impact eligibility to claim depreciation deductions for qualifying capital works.
Fact 4. Legislation changes don’t affect substantially renovated property
A property is considered substantially renovated when all, or substantially all of a building is removed or replaced. Some key examples of substantial renovations include replacing foundations of the building, walls, floors, roof or staircases.
If an investor purchases a second-hand property directly after its substantial renovation, the 2017 legislation changes do not apply. This means the new owner is eligible to claim on all new plant and equipment assets and the capital works.
Fact 5. The immediate deduction boosts cash flow
Investors can further boost their cash flow by claiming the immediate deduction on eligible assets valued up to $300.
This immediate deduction can be claimed in the year of purchase and there’s no limit to the amount of assets that can be claimed. This means that if they are eligible, the investor can potentially boost their cash flow by hundreds if not thousands of dollars.
Fact 6. New and old properties hold depreciation
There is a common misconception that older properties cannot hold depreciation deductions, which is false.
Deductions can be found in most properties, from brand new properties to properties built over twenty years ago.
Fact 7. Low-value pooling accelerates depreciation
Low-value assets that aren’t eligible for the immediate deduction are often placed in the low-value pool.
Low-value pooling allows owners to claim depreciation at an accelerated rate. When a plant and equipment item is allocated to the low-value pool, it can be depreciated at a rate of 18.75 per cent in the first year and 37.5 per cent each following year.
An item can only be included in the low-value pool if it is a low-cost or low-value asset.
Low-cost asset: opening value of $1,000 or more.
Low-value asset: a written down value of $1,000 or more. When an asset’s opening value was more than $1,000 but the residual value is now less than $1,000.
Fact 8. Hidden deductions are found in common property
When an investor purchases a property such as an apartment or townhouse in a complex, it will often be under a strata title. Owners of these properties can claim an apportioned deduction of the common property assets under the strata. These may include elevators, intercom systems and ventilation fans. Due to depreciation only being available for a portion of the asset, it may fall into the low-value pool or will qualify for an immediate deduction.
Fact 9. Site inspections are a key to step to maximising compliant claims
Both the National Tax and Accountants’ Association (NTAA) and the Australian Institute of Quantity Surveyors (AIQS) recognise that physical site inspections are essential for claiming maximum deductions compliantly. Failing to conduct site inspections often results in missed deductions or errors made on the tax depreciation schedule.
