From the desk of Mike Mortlock, Managing Director, MCGQS and REBAA Affiliate Member
If there’s one thing that really sticks in the craw of a tax depreciation specialist, it the huge number of people who miss out on deductions due to errors, mismanagement or ignorance.
I know… there are more frustrating things on the planet to worry about right now, and obviously it’s difficult to get a group of normal people riled up about something like this, but in my specialist role, maximising depreciation deductions is a thrill ride (I can already here my phone pinging in the background with dinner party invitations 😊).
Missing deductions mean handing the tax office money that rightfully belongs in the landlord’s pocket. As Kerry Packer kind of said once, politicians already do a lousy job of spending what they get, so let’s not hand them extra.
Those everyday property investors are your clients, and they are wanting to maximise every dollar. To help educate them, here are some of the key things you can share about the financial benefits of depreciation.
What you need to know
According to ATO data, nine out of 10 rental property owners are making mistakes with their claims, especially when it comes to repairs and maintenance.
ATO Assistant Commissioner Rob Thomson has declared rental property claims as one of the three main focus areas for the ATO this tax season, so investors need to be careful and smart with their tax returns.
One common mistake is claiming costs as Repairs & Maintenance (which are immediately and 100 per cent deductible) when they should be classified as Capital Expenses that need to be depreciated over the asset’s life.
Let’s look at the difference between the two:
- Repairs are replacements or renewals of worn-out or broken parts, like fixing a damaged window latch. Maintenance describes work carries out to prevent the future deterioration of something. A great example is a coat of oil on a back deck.
- Capital expenses relate to improvements to the property. This can include items such as a new bathroom fit out or installing an air-conditioner.
The trick is that different capital expenses have their depreciation claimed at different rates. It all relates to the expected lifespan of an improvement.
For instance:
- Division 40 (Plant and Equipment): This includes items like blinds, curtains, ovens, range hoods, garage door motors, irrigation systems, and hot water systems. These items depreciate at varying rates, but generally faster than building structures.
- Division 43 (Capital Allowance): This covers fixed components of the building structure and land improvements, such as concrete, timber, tiles, retaining walls, bricks, and most building parts. These costs are depreciated at 2.5 per cent per year over 40 years.
Are deductions worth claiming?
It’s worth noting that Capital Allowance deductions are limited to properties constructed after September 16th, 1987. Because many investment properties were built before this date, you may wonder if it’s still worthwhile for an investor to claim depreciation?
In most cases, the answer is ‘Yes!’.
If the property has had some renovations or extensions, professionals like me are qualified to estimate the value of these works, and the owner can claim the structural improvements carried out by the previous owner. Any improvements they make themselves are likely to be deductible as well.
If the property has been renovated or refurbished, either by the new owner or a previous owner, the costs of these renovations may be eligible as a Division 43 deduction.
For example, let’s say your client buys a house as an investment, and it was built before 1987. In this case, the original structure is considered fully depreciated.
However, it’s likely there’s been some upgrades since the home was built. These things – like kitchens and bathroom fit outs – can attract worthwhile, claimed depreciation.
Of course, your buyer client is unlikely to know what was spent on any capital upgrades. That’s where a qualified Quantity Surveyor like me can come in and prepare a
depreciation schedule for the property, assessing the estimated cost of any renovations and the relevant depreciation rates that can be utlised by the owner.
If you have clients looking to invest, be sure they’re aware of the enormous financial benefits that can come from properly claiming depreciation and cost. Money in an owner’s pockets will be better spent by them than the government.
