According to recent statistics released by the Australian Taxation Office (ATO), a large number of investors are still failing to claim all of the depreciation entitlements available to them.
It’s no surprise that this is the case: property depreciation can be quite a complex topic for investors to understand, and many investors remain unaware of depreciation and the different types of deductions available to them. Research shows that 80 per cent of investors miss out on thousands of dollars in depreciation deductions simply because they don’t claim depreciation at all or they fail to ensure their deductions are maximised.
To help explain some of the rules surrounding depreciation, here are several key definitions and facts about depreciation for investors as they prepare to visit their accountants to complete their annual income tax returns.
What is property depreciation?
As a building gets older, the structure and the assets contained within the property wear out – they depreciate. The ATO allows property owners to claim this depreciation as a deduction. A property must be income producing in order for the owner to qualify to claim depreciation.
Division 43 (capital works deductions)
Division 43 represents the deductions available for the structure of the buildings and the items within a building deemed to be irremovable. Examples include bricks, mortar, walls, flooring and wiring. The ATO allows investors to claim capital works deductions at a rate of 2.5 per cent over forty years. However, not all properties qualify. An investor’s eligibility to claim capital works deductions depends on the property type and the construction commencement date.
Residential investment property owners can claim capital works deductions if the property commenced construction prior to 18 July 1985. For commercial buildings, the legislated date is 20 July 1982. However, this does not always mean that the owners of older properties will not be able to claim capital works at all. If a property was constructed prior to these dates and a renovation has been carried out after the qualifying dates, the owner will still qualify to claim capital works deductions for the renovations, even if they were completed by a previous owner of the property.
Division 40 (plant and equipment depreciation)
Division 40 represents the depreciation deductions available for plant and equipment assets contained within a property. Plant and equipment items are mechanical and removable fixtures and fittings. Examples include carpets, freestanding lights and light shades, furnishings and hot water systems, as well as less obvious items such as garbage bins, mechanical exhausts and door closers.
Plant and equipment assets depreciate at a faster rate than structural items. The ATO provides an effective life for each individual asset. These assets are often updated and replaced over time, so regardless of a property’s age there will always be depreciation deductions available for every investment property owner.
The below graphic shows examples of how structural items and assets are categorised.
Many property investors miss out on depreciation deductions because they self-assess or estimate the costs in their investment property based on their own judgement.
To ensure deductions are claimed correctly, an investor should consult with a specialist Quantity Surveyor and ask them to arrange a tax depreciation schedule. A Quantity Surveyor will perform an inspection of the property to identify the assets contained in the property. All of the deductions for both division 43 and division 40 will then be outlined in the depreciation schedule for the investors Accountant to make the claim on their behalf.
Article provided by BMT Tax Depreciation.