15 Jul Don’t overlook a mid-year partial claim – Brad Beer
When an investor purchases a new property, it’s rare that they will own the property for a full twelve-month period before tax time comes around. As a result, many investors who have only owned their property for a short period of time will assume it is not worthwhile ordering their depreciation schedule until the following financial year. However, there are still significant deductions an investor can take advantage of for a partial year claim. Brad Beer explains.
Kevin: A couple of weeks ago, I spoke to brad Beer from BMT Tax Depreciation about the timing of tax depreciation schedules. He joins me once again.
Good day, Brad. How are you doing?
Brad: Great, Kevin. Great to be here as always.
Kevin: Thanks, mate. When an investor purchases a new property, it’s rare that they’re going to own that property for a full 12-month period before tax time comes around again – and we’re just starting a new tax year now. As a result, many investors who have only owned a property for a short period of time will assume it’s not really worthwhile ordering their depreciation schedule until the following financial year.
Are there still significant deductions an investor can take advantage of even for a partial-year claim, Brad?
Brad: Kevin, the answer is yes. The reason for that is if you do buy something… We don’t just go and buy properties and settle on the first of July, do we?
Kevin: No, we don’t.
Brad: Well, some people do but you don’t look for properties in order to do that.
How depreciation kind of works is that if you owned it for half of the year, things get kind of pro-rated – well, some things do – and you kind of get half of that deduction in the first year.
But because of some of the tax rules – they like to make intricate ways to make them not so easy – some things get a claim that’s the same regardless of whether you owned it for 2 weeks or 50 weeks, and so when you get it in the first year, it’s not like if I was to settle on the 1st of June, some things still get a substantial percentage of the deduction straight away or in the early year that aren’t sort of meaning it’s not going to get any deductions in that first year.
So, it’s always worth not waiting because if you do want to go back and get that deduction in a future year, then you’d have to actually amend a tax return, which if there’s a lot of money there to do that, it’s worth amending a tax return, but if you have the number already and you have the deductions already, you might as well put them in a tax return in that year and not necessarily wait for the future.
Kevin: Good point. I wonder if you’d explain for me immediate write-off and low value pooling. What’s that about?
Brad: Those are the two things that allow deductions in the first year to be a bit quicker. With a lot of things, as we said, if you owned it for half the year, you get half the deductions. But immediate write-off is that anything that you buy that has a cost of less than $300, regardless of 1 day or 364 days of ownership, it’s an instant deduction in that financial year.
So, when you buy right near the end of the financial year, all of the things that are worth less than $300 instantly get to get written off in that year. Things like smoke alarms, door closers, garbage bins, sometimes garage door controllers, and things like that get a quick claim in that first year.
Now, the second thing we mentioned there is around low value and low cost pooling, sort of the same thing somewhat. What this is is any item that’s worth less than $1000 gets to be claimed at 18.75% in the first year and then 37.5% in the following years.
Now, a lot of items get claimed at 10%, 20% and they do get pro-rated under the normal type of depreciation, but there’s no pro rata on this 18.75% in the first year. So if you had something and you bought and sold this property right in the last week of June and you had it available for rental and producing income, a $1000 item gets $187 for a few days. And if there’s a few of those in that property with no pro rata adjustment, this is how those adjustments really add up in that first financial year as a part-financial year sometimes.
Kevin: Gee, it’s a complex thing. Brad, I wonder if you could just provide us with an example scenario of the deductions an investor could claim for a partial-year period of ownership. Give me an example, say, towards the end of the financial year before the financial year comes around.
Brad: I took a live example here and looked at a house that an investor has bought and they’ve settled it with only 29 days of the financial year left, on the 2nd of June. It was a new house that they bought for a purchase price of $550,000.
Now, as I said, there’s these immediate write-off items that they can claim, things like the garbage bins and bathroom accessories, smoke alarms. We found a few of those, and there was a $1288 claim against those items initially that were claimed at 100% in the first year.
Then we have these low value pooled items, items worth less than $1000. We have in there range hood, blinds, cook tops, and these things, even though it’s only that small amount in the year, we were able to claim $2274 only in that 29 days of ownership.
Now, after that, you also have this claim on the building. Now it does get pro-rated in the first year. So, we have some Division 43, or that building component, and some dollars for the items that do get pro-rated outside of these ones that get claimed quicker. And we’ve actually got a total deduction for 29 days of about $4852 in that first financial year.
Now, from the 2nd of June, you only have a very small amount of rent because you’ve only had it for four weeks, so that’s an instant deduction that’ll come off the other income that you have that’ll mean some good cash in only 29 days of ownership.
Kevin: Wow, it’s certainly not to be sneezed at, $4000. That would be a nice mid-year gift, wouldn’t it?
Brad: It would be. It’s always worth assessing straight away in that year rather than waiting because I like $4,852 in deductions wherever I can get it.
Kevin: There you go. That’s another thing you might not be aware. Brad Beer from BMT Tax Depreciation.
Brad, thanks again for your time.
Brad: Thanks, Kevin. Always great to be here.