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What property investors need to know about depreciation

Mon September 04, 2017

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Are you thinking about purchasing an investment property? While this is an exciting milestone, there are a number of considerations and factors you need to be aware of before you do so.

In this article, we take a look at what deductions an investor is entitled to claim, focusing on property depreciation. We also take a look at some of the proposed changes the federal government have outlined to depreciation and how these changes could affect investors should the new legislation be passed.

Unlike other expenses involved in holding a property, an investor does not need to spend any money to be eligible to claim depreciation.

What is depreciation?

Over time, any building and the assets contained within it will experience wear and tear. Legislation allows the owners of any income producing property to claim this wear and tear as a tax deduction called depreciation.

Unlike other expenses involved in holding a property (such as interest on a loan, Property Managers fees, council rates, insurance and repairs and maintenance costs for example) an investor does not need to spend any money to be eligible to claim depreciation. For this reason it is often described as a non-cash deduction.

Types of depreciation deductions available

The Australian Taxation Office (ATO) defines two types of depreciation allowances available for property investors:

  • Capital works allowance (division 43):

These are the deductions an investor can claim for the structure of the building and any fixed items. Examples of items which should be claimed under the capital works allowance include the walls, doors, windows, kitchen cupboards, sinks, baths, toilets and retaining walls.

As a general rule, any residential building where construction commenced after September 15 1987 will entitle their owner to capital works deductions at a rate of 2.5 per cent per year for up to forty years.

Owners of older buildings constructed prior to 1987 should still find out what deductions are available, as often these buildings will have undergone some form of renovation which can result in deductions for the owner.

  • Plant and equipment depreciation (division 40):

These are the deductions investors can claim for the easily removable fixtures and fittings found within the property. Examples include carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans. When it comes to depreciating plant and equipment, the ATO assigns assets each with an individual effective life over which depreciation should be calculated.

What changes have been proposed to depreciation?

Recently the federal government announced some proposed changes relating to plant and equipment deductions. The details of the changes planned have been outlined in section two of Treasury Laws Amendment (Housing Tax Integrity) Bill 2017.

The bill advises that the government intend to amend the Income Tax Assessment Act 1997 (ITAA 1997) to limit deductions for plant and equipment in residential premises. In essence, the proposed new law will reduce the amount an investor can deduct for a previously used depreciating asset for the purposes of gaining or producing assessable income.

Recently the federal government announced some proposed changes relating to plant and equipment deductions.

Should the proposed legislation be passed, this means that residential property investors won't be able to claim depreciation for plant and equipment assets found in second-hand properties in which contracts exchanged after 7:30 pm on May 9 2017.

While this legislation is yet to be passed, it's important to note that existing investments will be grandfathered. This means that any investor who exchanged contracts on a residential property prior to May 9 2017 can still claim plant and equipment depreciation as normal. Investors who purchase brand new residential properties or any commercial building are also unaffected by these changes. 
The changes do not affect the way qualifying capital works deductions will be claimed, so eligible investors will still be able to claim deductions for this component, including any structural improvements completed by a previous owner.

To learn more about the proposed changes in the budget and how this may affect an investor's cash return, visit www.bmtqs.com.au/budget-2017

Why should you claim depreciation and who should you contact?

By claiming depreciation an investor will reduce their tax liability and therefore they will pay less tax.

Any additional funds an investor receives thanks to claiming depreciation can have a significant impact on the cash flow they have available and help to reduce the costs of holding the property.
To ensure that depreciation is maximised, it is recommended to speak with a specialist Quantity Surveyor, such as BMT Tax Depreciation.

Quantity Surveyors are one of the select few professionals recognised by the ATO as having the knowledge necessary to estimate construction costs for depreciation purposes. They use their skills to provide a comprehensive depreciation schedule outlining all the deductions an investor can claim.

To learn more about property depreciation and what you can claim, watch the following video:

For a free assessment of what depreciation deductions can be claimed in any investment property, speak with one of the expert staff at BMT Tax Depreciation on 1300 728 726 today.

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.

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