It’s a fine line between deductions and pain
Without obtaining a tax depreciation schedule it can be very easy for investors to incorrectly claim deductions for their rental properties.
One of the reasons depreciation is missed or claimed incorrectly is because investors don’t understand the difference between the types of deductions available.
Two mistakes often made when claiming depreciation without expert advice include claiming structural items as plant and equipment assets and claiming plant and equipment assets as capital works deductions.
While the two types of depreciation have clear definitions, these don’t necessarily help investors to correctly interpret depreciation claims. Below are the key features of capital works and plant and equipment assets.
Capital works deductions:
- Apply to the building structure and any fixed asset
- Investors can claim deductions for the cost of the original building where construction commenced after the 15th of September 1987
- Investors are entitled to claim a deduction for any other capital works (structural improvements) which occurred within the legislated dates
- Deductions are calculated at a rate of 2.5 per cent per year and are based on the historical costs of construction
Plant and equipment assets:
- Easily removable fixtures and fittings contained within an investment property
- Unlike capital works, these items are assigned an individual effective life over which depreciation can be claimed using one of two methods; prime cost or diminishing value
- Although depreciating at varying rates depending on the item, deductions for these assets are much higher than those calculated for capital works
Based on the above, investors who assign items to the incorrect category could easily claim plant and equipment at the incorrect rate of 2.5 per cent per year, missing out on substantial deductions. Conversely they could claim capital works deductions at a rate too high set for plant and equipment, also putting the investor at risk of an audit from the Australian Taxation Office (ATO).
To highlight how items should be correctly assigned and claimed, we examine an example for flooring in a brand new investment property. In the case study, all the flooring types have been assigned the same value of $10,000 to provide a direct comparison.
As you can see from the above example, depreciation for flooring in an investment property is not calculated in the same way. Carpets, linoleum, floating timber and vinyl are considered plant and equipment as they can be removed and replaced easily, while tiles and original hardwood floors are classified as structural items and therefore should be claimed as capital works deductions.
Flooring is just one area easily confused when calculating depreciation. The amount of deductions a specialist Quantity Surveyor will find is magnified, as both a site inspection is performed and a depreciation schedule is provided for the property as a whole.
Deducing the classification of capital works allowance and plant and equipment items is an area of expertise for a tax depreciation specialist. The benefits of asking an expert for advice on depreciation are clear; not only will you receive more when you complete your income tax return, you will also have added security in the event of an audit from the ATO as you will have the information necessary to support your claim
To learn more, visit the residential property depreciation page on BMT Tax Depreciation’s website.
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.