Claiming the most back from your investment property is key to your success and long-term investment strategy. However, it is just as important to ensure that you are claiming everything correctly.
One of the biggest mistake’s investors make when boosting their property’s cash flow is confusing expenses and capital improvements. This error can see you claiming depreciation as an expense and will come under Australian Taxation Office (ATO) scrutiny.
What is an expense?
When thinking of rental property expenses, some of the first things that come to mind include interest repayments, council fees, insurance premiums and repairs.
While an expense means an upfront hit to the pocket, you can claim back the full amount straight away. Expenses work as a tax deduction; they reduce your taxable income which means you pay less tax.
What is depreciation?
Property depreciation is the natural wear and tear of a property and its assets over time. Depreciation can be claimed under two categories – capital works and plant and equipment.
Capital works deductions are claimed on the structural part of the property at a set annual rate of 2.5 per cent. BMT Tax Depreciation finds that capital works make up on average 85 to 90 per cent of total depreciation claims.
Plant and equipment deductions can be claimed on the easily removable fixtures and fittings. A plant and equipment asset will depreciate across its effective life as set by the ATO, or if eligible, in the low value pool or as an immediate deduction.
Depreciation isn’t an expense, it’s a ‘non-cash deduction’. This is because depreciation is a natural process, and you don’t need to spend anything to claim it.
When explaining expenses and depreciation like this, it seems as though they are polar opposites. However, claiming becomes more complex when distinguishing repairs and capital improvements.
How to tell the difference between a repair and a capital improvement
Your accountant and a specialist quantity surveyor are the two professionals who can advise on what is an repair, and what is an improvement.
Generally, a capital improvement is when the condition or value of an item is improved beyond its original state. When this occurs, it can be depreciated as either capital works or plant and equipment.
A repair is work completed to fix damage or deterioration of a property or asset. Some examples of repairs include fixing a door latch or replacing part of a damaged gate.
Case study: Repair or depreciation?
Tim owns an investment property. Following a major storm, part of his front fence was damaged.
This wooden fence was built when the property was constructed in 2000. Rather than fixing the damaged part, Tim decided to replace the entire fence with new Colorbond steel fencing.
Although Tim replaced the fence due to damage, he can’t claim the new Color bond fencing as an expense. He will need to have the fence included in his property’s tax depreciation schedule so it can be depreciated using capital works deductions.
What if it’s a part-repair and part-improvement?
Damage to a property isn’t always straightforward and can come unexpectedly. Sometimes, one incident can result in both a repair and an improvement.
Let’s use the scenario of a hot water system breaking and damaging part of the wall in the process. The new hot water system would be a plant and equipment asset and the patching of the damaged wall would be a repair. You would need to claim the hot water system over several years using depreciation, while the wall-patching expense can be claimed straight away.
Claim maximum depreciation with BMT
BMT Tax Depreciation has helped thousands of investors claim more from their investment properties by claiming depreciation. Located Australia wide, BMT has prepared over 700,000 tax depreciation schedules and can prepare one for your property today.
For more information on BMT Tax Depreciation Schedules Request a Quote or call 1300 728 726.