Recently one of our Property Investment clients was told that they will be able to claim in excess of $160,000 in Tax Deductions for the life of the property. They were also told that they would be able to claim over $20,000 in the next 4 years.
These tax deductions will be providing them with a significant level of additional cashflow on their investment property.
So how were they able to achieve this?
It is called Depreciation
When a building gets older and items within it wear out, they depreciate in value. The Australian Taxation Office (ATO) governs legislation that allows owners of any income producing property to claim a tax deduction for this wear and tear. There are 2 types of deductions that you can claim.
Capital works deductions:Is the deduction for the building’s structure. Available on properties constructed post 1987 (residential).
Plant and equipment assets: Includes assets which can be easily removed from the property. The asset’s condition, quality and effective life all determine the allowances available.
What is deductible under capital works allowance?
Capital works deductions or building write-off refers to the tax deduction for the building’s structure and items considered to be permanently fixed to the property. The ATO recognises that your property will deteriorate and likely need repairs and maintenance work done, for you to continue to produce a taxable income.
In a residential property built after 15th September 1987, capital works deductions are available to be claimed at 2.5% for the ATO specified life of the property which is 40 years. This includes items such as the foundation, walls, roof and items which are considered fixed to the building such as doors, windows, kitchen cupboards, toilet, sinks and tiles.
Here are a few examples of typical depreciable items you could claim under a capital works deduction.
Residential Property:
- Built-in kitchen cupboards
- Clothes lines
- Doors and door furniture (handles, locks etc.)
- Driveways
- Fences and retaining walls
- Sinks, basins, baths and toilet bowls.
What is plant and equipment?
Plant and equipment assets are items which are considered by the ATO to be easily removable from the property or mechanical in nature.
Examples of items that can be depreciated as plant and equipment include:
Residential Property:
- Hot water systems, heaters, solar panels
- Air-conditioning units
- Blinds and curtains
- Light fittings
- Swimming pool filtration and cleaning systems
- Security systems
Under current legislation, owners of second-hand residential properties which exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. Owners can claim for any new plant or equipment assets added to the property such as an oven or dishwasher.
Tax depreciation benefits
Claiming depreciation deductions is a significant taxation benefit, and one which many investment property owners are unaware of. Depreciation is a non-cash deduction meaning you do not need to spend any money to claim it.
How do property investors claim depreciation?
In order to claim depreciation deductions property investors generally need to enlist a specialist Quantity Surveyor to complete a comprehensive capital allowances and tax depreciation report or schedule. When completed, a tax depreciation schedule outlines the deductions available for both capital works and plant and equipment assets and is used each financial year when preparing tax returns.
We use and recommend BMT Tax Depreciation So if you would like more information please contact any of our Property Management team who will point you in the right direction.
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Hicks Real Estate Team
Hicks Real Estate is a Brisbane based, full-service real estate agency supporting buyers and sell as well as renters and property investors. With almost 20 years experience in the local market, we are the real estate experts you can rely upon.
