A large number of property investor’s complete additions or alterations to their investment property each year, yet many of these investors are unaware of how these renovations will affect the deductions they can claim.
As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a deduction.
Below are five must know facts for property investors to help them to understand property depreciation and ensure the maximum deductions are claimed, particularly when a renovation is involved.
1. Claim depreciation for older properties
One common misconception investors have is that they cannot claim depreciation on older properties. This arises due to limitations the ATO place on eligibility for capital works deductions (depreciation for structural components of a property). ATO legislation advises that owners of residential properties in which construction commenced prior to the 18th of July 1985 cannot claim capital works deductions. However, depreciation of plant and equipment is not limited by age. It is the condition and quality of each item which contributes to the depreciable amount. Therefore owners of older properties can claim depreciation.
2.Claim depreciation for renovations completed by a previous owner
Often when an investor purchases an older property, at some stage since the building’s original construction, renovation work may have been completed.
Although the ATO restricts property owners from claiming capital works deductions for properties constructed prior to the 18th of July 1985, they can claim capital works for renovations completed after this date, even if the work was completed by a previous owner.
Quantity Surveyors will discover any previous renovations, even less obvious ones like new plumbing or electrical wiring, during a site inspection of the property.
3. Get a depreciation schedule prior to renovation
Renovations can provide deductions over and above those received during a normal depreciation claim. This is because the owner can claim a deduction for any depreciable assets removed and disposed of during a renovation. This process, called ‘scrapping’, allows investors to claim the remaining depreciable value for assets removed as a deduction in the year the item is scrapped.
To be eligible the property must be income producing before the renovation takes place. A site inspection and tax depreciation schedule should also be completed before any items are removed and work begins to allow the Quantity Surveyor to take photos and value the items contained within the property.
4. Install assets that maximise future deductions
Selecting which assets to replace during a renovation can make a difference to future deductions. This is because each asset’s depreciable value is calculated based on its individual effective life.
For example, deductions available in the first full year depreciation claim for carpets, floating timber floors and tiles differ. If an owner has decided to install new flooring to the value of $2,000, but is unsure which flooring type to install, the deductions that become available afterwards may assist their decision. By choosing to install $2,000 in carpets rather than floating timber or tiles, the owner will be entitled to claim $400 in depreciation deductions in the first year. This compares with $267 in depreciation from floating floorboards or $50 in deductions from tiles, based on a full financial year.
5. Update your schedule after the renovation is complete
A second tax depreciation schedule should be prepared after a renovation to show any removed assets identified in the original schedule and the remaining depreciable amount that can be claimed for these items as an immediate deduction. The new schedule will also detail depreciation deductions available for all newly installed plant and equipment assets or capital works expenditure as well as the depreciation deductions for any original assets remaining for the life of the property (forty years).
To learn more about depreciation, visit the BMT Tax Depreciation Overview page on their website or contact one of the expert staff at BMT on 1300 728 726.
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) 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.