With property prices steadily rising, co-ownership of property is becoming increasingly common. Co-owning property has the immediate benefit of increasing your purchasing power while reducing expenses. Brad Beer, from BMT Tax Depreciation, explains the little known benefits of split depreciation schedules in this case as well.
Kevin: With property prices continuing to rise, co-ownership of property is becoming increasingly common. Co-owning property with a friend, a family member, or a business partner has the immediate benefit of increasing an investor’s purchasing power while reducing the burden of corresponding expenses.
Specialist quantity surveyors can supply split deduction schedules by applying methods that substantially increase the depreciation deductions when an investment property has more than one owner. What are some of the methods they use? Let’s turn to our experts in this field, BMT Tax Depreciation. Brad beer joins me.
Good day, Brad.
Brad: Hi Kevin. Great to be here. How are you?
Kevin: I’m very well, thanks mate. Thanks for your time again.
Brad, I wonder if you’d explain the low cost and the low value assets. What are they?
Brad: Yes, absolutely. What happens when items are purchased as part of your investment property for a value of less than $1000, the legislation just allows us to write them off quicker because they are put into what’s called a low cost pool. And it’s anything that has a value of less than $1000.
The low value pool is if it drops down to that value of less than $1000 as you start claiming that depreciation. So it may have been $1200 in the first year and you claimed some of it in the first year, and when it gets down to that lower value, you get to claim these things at higher rates.
Kevin: What’s the accelerated rate of deductions that these items can be claimed at, say, when low value pooling is used?
Brad: What it is, rather than its normal effective life rate, which might be 15% or 20%, it’s actually at 18.75% in the first financial year without a pro rata adjustment and 37.5% in all the following years. Now, 37.5% is a pretty high percentage. It’s much higher than the 15% or the 20% that a lot of things actually get claimed over otherwise.
Kevin: Brad, why is it important to choose a depreciation schedule that assigns the owner’s interest in each asset first before calculating depreciation?
Brad: The simple reason for that is that when you buy a property and you’re buying a whole bunch of things including what we’ll call simple assets, if the asset had a value of let’s say $1600, if you owned half of that asset you’re only actually buying half that asset – therefore an asset worth $800 – meaning you’d get to drop into this low value pool straight away instead of at a later date. And all of the assets get split this way.
Kevin: Okay, yes. That’s fantastic. Then using a cooktop as an example, what’s the difference in the deductions a property owner can claim say with and without a split deduction schedule? Is that possible to tell us?
Brad: Yes, it is. Let’s take a cooktop as an example. Let’s say that cooktop was $1624 in value. Under its normal claim, which is over 12 years, the first year of that cooktop would be a claim of $226. Now, if you just divide that by two, you’d have a claim of $113 each, so $113 would be your claim.
If you owned half of that property and you only owned $812 worth of that cooktop – as in half of it – then you actually go into this low value pool. And in the first full year at that 37.5% rate you’d actually end up with a claim of $248 for your half of that cooktop. As opposed to just dividing your cooktop and getting the $113, it ends up at $248 if it was a year where you had that 37.5%.
When you do this across multiple items, it actually makes quite a difference sometimes to the early years of ownership if you’re a partial owner.
The other place that works really well is when you have things that can be claimed at 100% – if you owned something that’s worth $500 and you own $250 worth of it – you’ll get an instant deduction for that full amount because you’ve actually split the value of the asset as opposed to getting it over years and years.
It makes quite a bit of difference in those early years to maximize those deductions and therefore give you more cash back in your pocket.
Kevin: Yes, that makes a lot of sense. That leads me to another question, then. Talking about joint ownership, is there a minimum percentage of ownership in which a split depreciation can be applied?
Brad: There’s no minimum percentage. The regular is to go 50/50, and then sometimes you see the husband and wife…
Brad: …A low percentage for the person with the lower tax rate. It doesn’t matter if there are three owners, four owners, five owners; you can still split these depreciation schedules up quite easily if you have the software built properly – which we do – so that at your percentage of ownership, you get your percentage of the value of that item and therefore you get your claims. It will always maximize those deductions in the early years for each of these owners in a split-up situation.
Kevin: Of course, we’re into a new financial year now. I guess any time is a good time to be talking about depreciation schedules, not just at the end of the financial year, Brad.
Brad: You’re going to do a tax return soon after the end of the financial year, so once you get to the accountant, it’s best to have your depreciation schedules there ready. When we do one, we actually send a copy to the accountant as well so that when you turn up, he’s had an opportunity to have the numbers in there ready to do it and not have to go back and try to make it happen at a later date.
Kevin: Yes, great information. That’s why it’s always good to deal with a specialist in their field, and that’s why we recommend BMT Tax Depreciation.
Brad Beer, thank you so much for your time.
Brad: Excellent. Great to be here, Kevin. Thank you.