Tag: deductions

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Expert Tips RENO ADDICT

The deductions property investors often throw away

All too often we see investors contacting specialist quantity surveyors to organise a depreciation schedule after they have completed renovations to an investment property. In most instances this is too late for the investor to claim all of the deductions they are entitled to.

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If a client mentions they are considering renovating their investment property, it is important to recommend they speak to their specialist quantity surveyor straight away. This is because there may be depreciation deductions available for any disposed assets or demolished building assets being removed during the renovation process.

Property investors scrap items within a property for several reasons. The most common reason is ‘not fit for purpose’ because of obsolescence, functional inadequacy or dated style.

Essentially, if an item is scrapped it is a loss to the owner. Legislation allows property investors to claim additional deductions over and above their normal depreciation claim for assets being removed from their property. The remaining depreciable value of any scrapped items can be claimed in the year these items are removed from the property.

To take advantage of deductions for scrapped assets, a depreciation schedule must be arranged both before and after the renovation takes place. This will allow the quantity surveyor to complete a site inspection of the property to value all of the items and to take photographic records of the assets contained within the property. This evidence and the pre-renovation schedule will substantiate an investor’s claims should the Australian Taxation Office complete an audit of their annual income tax assessment.

Once the renovation has been undertaken, the quantity surveyor will compile an itemised schedule which will detail the depreciation deductions available for the new plant and equipment and capital works deductions obtainable for the owner of property.

Any removed assets identified initially will show a left over un-deducted amount in the property depreciation schedule. This amount can be claimed immediately. The new assets can then be depreciated as normal based on their effective life.

Depreciation and renovation case study

Jonathan purchased a fifty year old, two bedroom house. After renting it out for two years he decided to renovate the property. In its pre-renovation condition the house contained carpet, blinds, an oven, a cook top, ceiling fans, a split system air conditioning unit, a hot water system and light shades.

Jonathan engaged a specialist quantity surveyor to complete a property depreciation schedule when he originally purchased the property two years ago. Upon hearing about the additional deductions available when renovating from his Accountant, Jonathan contacted a quantity surveyor before starting the renovation to find out more. After obtaining information and discussing the benefits, Jonathan found that he was able to use his existing schedule to work out the un-deducted value of the items which were to be removed during the renovation.

When the original property depreciation schedule was completed, a depreciation expert visited Jonathan’s house and conducted a full site inspection. During this inspection they took notes and photographs of all depreciable items. This original schedule included all of the items being removed from the property.

The table below outlines the extra deductions that became available to Jonathan during the renovation.

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Jonathan claimed $9,073 in extra deductions that year in his personal tax return. After Jonathan completed the renovation he contacted the specialist quantity surveyor to update the property depreciation schedule. They inspected Jonathan’s property again, documenting all of the new additions.

The specialist quantity surveyor calculated the construction write-off allowance now available on Jonathan’s new extension. Some of the new additions included a new oven, carpet, air-conditioning, a hot water system and blinds.

In addition to the $9,073 claimed on the removed assets, Jonathan was able to claim $8,700 in depreciation deductions on the new items in the first year alone and $29,300 in the first five years. Jonathan was able to maximise the depreciation deductions on his investment property both prior to and after the renovation by taking the depreciation schedules to his Accountant to make his claim when he completed his annual income tax assessment.

Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation. Click here for more.

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Outdoor & Exteriors RENO ADDICT Shopping

Outside there’s $3,491 more in deductions to be claimed

As summer brings warmer weather to our backyards, it is a great time for property investors to think about the outdoor areas of their investment properties.

Outdoor areas in investment properties contain a number of structures and assets which are worth thousands of dollars for their owners. These items also experience wear and tear over time. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this wear and tear as a depreciation deduction when completing their annual income tax assessment with an accountant.

Before an investor can claim depreciation, it is recommended they consult with a specialist quantity surveyor to arrange a tax depreciation schedule for the property. A tax depreciation schedule will outline all of the deductions available for the structure of the property as well as the plant and equipment assets contained both inside and outside of the property.

The deductions a specialist quantity surveyor outlines on a depreciation schedule are split into two types. Structural items will be classified as capital works deductions, while assets which can be easily removed from the property can be claimed as plant and equipment depreciation.

Items classified as capital works will depreciate at a rate of 2.5 per cent each year over forty years. Plant and equipment assets, on the other hand, each have an individual effective life as set by the ATO.

The following graphic shows some of the depreciable plant and equipment assets and structural items found within the yard of an investment property as well as the first year depreciation deductions an investor could claim for these items.

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Examples of outdoor structures which depreciate, as shown in the graphic, include the in-ground swimming pool, pool fencing, shade sails, pavers and window awnings. Other common structural assets found in the yard which depreciate include concrete slabs, clothes lines and sleepers.

Depreciable plant and equipment assets found in the yard of the pictured property included solar garden lights, outdoor furniture, garden watering systems, swimming pool filters and chlorinators. Other common examples of depreciable plant and equipment assets which might be found in the yard include garbage bins, garden sheds and freestanding barbeques.

As the assets outside a property experience wear and tear, it also makes sense to check in regularly with your property manager to see if there are any necessary repairs and maintenance required. If there are, it is also best to check with your specialist quantity surveyor before completing any work to the property.

While work completed to repair damage (such as mending part of a fence) or to prevent deterioration to a property (for example oiling a deck) is able to be claimed as an immediate deduction in the year of the expense, any work which improves the condition or value of an object beyond it’s original state at the time of purchase will be considered a capital improvement. Capital improvements completed will also be classified as either capital works deductions or depreciated as plant and equipment using the asset’s individual effective lives.

If an investor already has a depreciation schedule and plans to complete improvements to the yard, a specialist quantity surveyor can provide information on any remaining deductions for items planned for removal. Removing items could entitle an investor to claim additional deductions using a process known as ‘scrapping.’ Using this process, any remaining depreciable value can be claimed as a deduction in the financial year the item is removed.

When any new structural additions or plant and equipment assets are added to an investment property, it is recommended to ask your specialist quantity surveyor to provide an updated depreciation schedule outlining the deductions for any new items.

Maximising depreciation deductions for items outside a property and carefully considering whether any improvements can be made can add thousands of dollars to an investor’s pocket. It also can add additional value to the property and appeal to tenants, helping to increase your rental return.

Quantity surveyors can provide a free estimate of the depreciation deductions available in any investment property. To request an estimate and obtain their advice, click here.

— Bradley is the chief executive officer of BMT Tax Depreciation. Bradley joined BMT in 1998 and as such he has substantial knowledge about property investment supported by expertise in property depreciation and the construction industry. 

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RENO ADDICT

Include depreciation deductions in your renovation budget

Property investors who decide to embark on a renovation are often unaware that any additions made will not only potentially add value to the property, they also can impact the deductions they can claim come tax time.

Owners of income producing properties are entitled to claim deductions in the form of depreciation for both the structural items such as walls, doors and floors in an investment property as well as for the plant and equipment assets found such as ovens, carpets, dishwashers and air-conditioning units.

When an owner removes existing structures or adds new ones, or if they remove or replace plant and equipment assets, it is important they seek expert advice from a specialist quantity surveyor before beginning the work.

There are three important points a property owner must consider when undertaking a renovation to their investment property:

  • The types of items chosen can impact the future deductions which can be claimed
  • Any items removed during a renovation may have remaining depreciation deductions available that the owner can claim
  • The investor should arrange a tax depreciation schedule both before and after the renovation takes place

To help investors understand these three points, let’s look at an example scenario.

The owner of a ten-year old property is considering completing a renovation after having owned and rented the property for just one year.

The owner has a budget of around $25,000 to spend on new items including flooring, appliances, heating and cooling assets. They are also hoping to upgrade structural assets within the kitchen including the cupboards and bench tops.

After obtaining quotes for some of the items they are considering updating, the investor is unsure which assets would provide them the best value for money, especially when it comes to flooring, heating and cooling assets.

To help make their decision, the investor decided to consult with a specialist quantity surveyor to find out which items would provide maximum deductions to help recoup some of the costs involved in the renovation at the end of financial year when they complete their income tax return. The information they learned also helped the investor to make smart choices between items to help them stay close to their $25,000 budget.

Below is a table outlining the potential costs of new items and the first year deductions the investor could claim.

2015_TA107_Deductions for potential new items_TABLE

As the table demonstrates, when choosing to install flooring, the depreciation rate for carpet and vinyl is much higher than floating floors or tiles, even though the prices for these assets are cheaper for the owner. This investor therefore chose to install new carpets and vinyl in their investment property. These two assets would result in a $654 depreciation deduction in the first year alone.

To stay within their budget, rather than update all cooling and heating assets, the investor decided only to improve the existing split-system air conditioner to ducted air conditioning. By upgrading to ducted air conditioning, the owner would be entitled to claim $978 in deductions in the first year for this item, much higher than the deductions they would receive if they only considered a replacement for the existing split-system air conditioner.

The investor chose to update the kitchen cupboards and replace the old laminated bench tops with stone. Although structural assets like these must be claimed as capital works deductions and will depreciate at a lower rate than plant and equipment assets, the increased expense of these assets meant the deductions for these options were higher. Combined with the increased value these items would add to the property, the investor preferred these options over choosing only to install a new laminated bench. The existing sink was kept rather than scrapped to save money on the budget.

Appliances such as the range hood, cook top, oven and dishwasher all depreciate at much higher rates when using the diminishing value method of depreciation, so the owner decided to put a significant portion of their budget towards updating these assets.

For the $25,480 in assets the investor had chosen, the investor found they would receive a $2,217 deduction in the first year alone.

Prior to the renovation, the investor had asked their specialist quantity surveyor to complete an inspection and produce a tax depreciation schedule for the existing assets within the property. The quantity surveyor performed a site inspection taking notes, measurements and photographs of all of the existing structural items and plant and equipment items within the property.

As a result, the investor was able to claim additional deductions for any remaining depreciable value for removed assets in the year the items were removed and scrapped.

Below is a table of the existing assets the owner chose to scrap and replace, including their remaining depreciable value:

2015_TA107_Remaining deductions available for removed items_TABLE

As the example shows, the owner could also recoup a significant amount of the costs involved in the renovation by claiming deductions for scrapped assets, in this case $11,574.

An updated depreciation schedule would capture the new additions and outline the deductions the investor could claim for new assets installed. The investor can also continue to claim deductions for any existing assets kept within the property for their remaining depreciable life.

The advice of a specialist quantity surveyor proved worthwhile for this investor to help make the best decisions and reduce the overall costs of this renovation. By claiming depreciation, the investor not only benefited by improving the value of their investment property, they also saved a significant amount of money.

– Bradley Beer is the managing director of BMT Tax Depreciation. A depreciation expert with over 16 years experience in property depreciation and the construction industry.

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RENO ADDICT

When is a repair on a rental property an improvement as far as the ATO is concerned?

The Australian Taxation Office (ATO) has issued a number of warnings recently indicating that rental property owners should be careful when claiming deductions.

Common errors highlighted by the ATO include claiming rental deductions for properties not genuinely available for rent, incorrectly claiming deductions for properties only available for rent for part of the year, claiming costs as repairs when they should be depreciated as a capital improvement and claiming capital works incorrectly as plant and equipment.

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Navigating the rules relating to rental property deductions can be quite complex for owners, particularly when it comes to depreciation. It’s important that owners have a basic understanding of depreciation legislation and the terminology used to categorise the deductions which can be claimed within a property. This includes recognising the difference between repairs, maintenance and capital improvements.

To assist investors to avoid a tax headache and claim deductions correctly this financial year, here are some of the key depreciation terms and tips on how to avoid incorrect claims.

Capital works deductions versus plant and equipment depreciation

Deductions for capital works comprise of the structural elements of a building, including fixed and irremovable assets. Examples include the roof, walls, built in cupboards, clothes lines, windows, doors and even the driveway. Dependent on the property’s age, investors can generally claim capital works deductions at a rate of 2.5% per year.

If a residential property was constructed prior to 15 September 1987, there are restrictions which apply. However, investors who own older properties may still be entitled to capital works deductions for any renovations, including those completed by the previous owner.

Plant and equipment items on the other hand depreciate at a much faster rate. Examples include carpets, hot water systems, air-conditioning units, security systems, blinds and curtains. Determining the deductions for these items is not dependent on their age, rather their condition and quality. To calculate depreciation for plant and equipment, the effective life of each individual asset set by the ATO should be used.

It’s not uncommon for investors to self-assess depreciation deductions for plant and equipment items. However, by doing so they are putting themselves at risk of the following mistakes:

  • They can categorise plant and equipment assets as capital works deductions or vice versa. This mistake can result in plant and equipment assets being claimed at only 2.5% per year, rather than at their higher effective life rate. It can also lead to capital works items being claimed at higher rates than they should be, placing the investor at an increased risk of an ATO review of their claim and potentially resulting in them having to pay cash back.
  • They could incorrectly determine a plant and equipment asset’s effective life based on its condition. For example, they may believe a carpet only has a remaining effective life of two years. However, carpets are deemed as having an effective life of ten years in residential properties. Incorrectly determining an assets effective life could result in missed claims.

Repairs and maintenance versus capital improvements

Investors will face a scenario where work is required to ensure upkeep or repair damage done to their property. The work completed can inadvertently improve an item’s value beyond the original condition of an asset.

The ATO provides clear definitions to help investors to determine the difference between what is considered a repair, regular maintenance and what is defined as a capital improvement. A repair involves any work completed to fix damage or deterioration of a property. Examples include replacing part of a fence broken during a storm. Maintenance is considered work which will prevent damage or deterioration, for example having the carpet cleaned or oiling a deck.

The costs for repairs and maintenance can be claimed as a 100 per cent deduction in the same year of the expense. However, if an investor was to remove and replace the entire fence, carpet or build a new deck, this will fall into the category of capital improvements.

Capital improvements, or work which improves an asset beyond its original condition, must be depreciated and claimed as a capital works deduction or as depreciation.

How to avoid the risks

Investors can avoid many of the risks of claiming deductions incorrectly for their property by seeking the advice of a specialist quantity surveyor. They will complete a site inspection of the property to identify all of the plant and equipment assets found, take measurements and conduct research to find the correct capital works deductions available and outline deductions for plant and equipment assets based on their individual effective life. A tax depreciation schedule will outline these deductions for the property owner’s Accountant to process their claim.

A depreciation schedule provided by a specialist quantity surveyor will help to ensure the correct and maximum deductions are claimed and minimise risk for both an investor and their accountant.

–Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Chief Executive Officer of BMT Tax Depreciation. Bradley joined BMT in 1998 and as such he has substantial knowledge about property investment supported by expertise in property depreciation and the construction industry.

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RENO ADDICT

Depreciation differences: old versus new residential properties

Property depreciation is a non-cash tax deduction available to the owners of income producing properties. As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a tax deduction. Depreciation on mechanical and removable plant and equipment items such as carpets, stoves, blinds, hot water systems, light shades and heaters are all valid deductions. There are also deductions available for the wear and tear of the structural elements of a building, commonly called a capital works deduction.

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Investors often wonder about the depreciation potential of older properties compared to new properties. The simple answer is that the owners of newer properties will receive higher depreciation deductions. However, all investment properties both new and old can attract depreciation deductions for their owners.

Newer properties have newer fixtures and fittings, so the starting value of those items is higher, resulting in higher depreciation deductions. The same applies to the capital works deduction. 2.5% of the structural costs of a building can be claimed per year for forty years. Construction costs generally increase over time, making building write-off deductions on new buildings higher.

Owners of older properties can claim the residual value of the building up to forty years from construction. For example, if an investment property is five years old, the owner will have 35 years left of capital works deductions to claim.

Capital works deductions are governed by the date that construction began. If a residential building commenced construction before the 15th of September 1987, there is no building write-off available. Investors who own properties that are built before this date will still be able to make a claim on the fixtures and fittings within the property and include any recent renovations, even if the renovation was carried out by a previous owner.

It is always worth getting advice about the depreciation potential of a property regardless of age. The deductions are not as high on older properties but there are usually enough deductions to make the process worthwhile.

The table below shows the difference a depreciation claim can make for the owners of new, old and recently constructed residential houses.

2015_T004 Old older new houses
The depreciation deductions in this case study have been calculated using the diminishing value method.

As you can see, although the owner of a newer residential house constructed after 2012 will receive much higher deductions, the owner of an older house constructed in 1980 will still receive substantial deductions. In the first financial year alone they can claim $3,298 in deductions and over five years deductions total to $12,357.

To obtain a free estimate of the deductions available in any investment property or for obligation free advice, investors can contact one of the expert staff at BMT Tax Depreciation on 1300 728 726.

– Bradley Beer is the managing director of BMT Tax Depreciation. A depreciation expert with over 16 years experience in property depreciation and the construction industry.

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RENO ADDICT

The great division: division 40 versus division 43

In order to maximise property depreciation deductions, it is important to understand the difference between division 40 and division 43 regulations. These two main pieces of legislation affect rates at which assets can be written off and claimed. Knowledge of the difference between division 40 and division 43 assets can assist in ensuring that deductions are maximised. This is particularly important when planning to replace any existing structures or items contained within an investment property.

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Division 43
Otherwise known as ‘capital works allowance’ or ‘building write-off’ – division 43 is a deduction available for the structure of the building and the items within it that are deemed irremovable.

Division 43 can be claimed at a rate of 2.5% over 40 years. However, not all properties qualify for this allowance. As a rule, any residential property in which construction commenced prior to 15 September 1987 will not qualify. There are exceptions to this rule when renovating. Any renovations completed after the legislated dates set by the Australian Taxation Office (ATO) may also entitle an investment property owner to deductions, even if the renovations were completed by a previous owner of the property.

Division 40
Also known as ‘plant and equipment’, these are the removable assets found within an investment property. Examples of division 40 items which owners can claim depreciation deductions for include lights, blinds and ceiling fans.

These assets depreciate according to an individual effective life and therefore at a much faster rate than structural items. For example, in residential properties carpet can be claimed at a rate of 20% over 10 years (using the diminishing value method).

Owners of all investment properties, regardless of the property’s age, are eligible to claim deductions for these assets.

Common mistakes investors can make by incorrectly categorising items

It is easy for investors to incorrectly allocate deductions for items by not seeking expert advice. Particular assets can cause great confusion as some assets will qualify in part for division 40 deductions and partly for division 43 deductions. For example an air conditioning unit falls under division 40 whilst the ducting for the same unit falls under the division 43 allowance. Similarly, an in-ground pool falls under the division 43 allowance whilst the pumps for the pool fall under division 40.

In order to ensure your deductions are maximised within the ATO guidelines, it is essential to have a specialist quantity surveyor visit the property and complete a site inspection which lists all assets and outlines the deductions correctly.

What to be aware of when renovating

Understanding the depreciation rates of different items can help owners to make informed decisions when renovating.

Investors can make their choices to install items which will improve deductions and depreciate at a faster rate. For example carpet (division 40) depreciates at a faster rate than tiles (division 43); blinds (division 40) depreciate faster than wooden louvres (division 43) and ornamental lighting (division 40) depreciates faster than down lights (division 43).

The advantage of replacing division 40 assets is that the owner can depreciate these items within a shorter time period depending on the assets individual effective life, potentially resulting in the full depreciable value of the asset being claimed and providing the maximum deductions to the owner within just a few years.

It is also important to be aware that removing assets can affect both division 40 and 43 deductions. Any removed assets could entitle their owner to additional claims. If there is any remaining depreciable value for assets being removed, this residual value can be claimed as a 100% tax deduction in the same financial year as the items disposal.

A depreciation schedule should be arranged both before and after a renovation to capture both existing assets which are planned for removal and any new assets installed by the property owner. A specialist quantity surveyor will complete a depreciation schedule which allows owners to claim the maximum deductions possible.

Case study:

David purchased an existing house one year ago. The property was approximately fifty years old and was acquired as an investment.

After BMT Tax Depreciation conducted a detailed site inspection and noted the eligible plant and equipment, a depreciation schedule was prepared. The schedule identified $15,000 worth of depreciating assets.

Whilst the property was income producing, David claimed a total of $2,700 in deductions in his first financial year.

David decided it was time to build a new investment property on the site. In doing so the existing building was demolished and removed from site. The residual depreciable value of $12,300 became an immediate 100% deduction in the year of demolition.

The following shows some examples of division 40 and division 43 items found inside and outside of a normal home.

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Be sure to obtain a tax depreciation schedule from a reputable quantity surveying firm to maximise your depreciation claim. For obligation free advice for any property on the deductions available for both division 40 and division 43 assets, speak with one of the expert staff at BMT Tax Depreciation on 1300 728 726 today.

– Bradley Beer is the managing director of BMT Tax Depreciation. A depreciation expert with over 16 years experience in property depreciation and the construction industry.

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RENO ADDICT

How to save money by claiming tax deductions on furniture in a rental property

Often property investors rent out their property fully furnished. Depreciating furniture can add thousands of dollars to the owner’s depreciation claim.

The below table provides an example of the difference that claiming depreciation on a $16,000 furniture package could make to an investor who purchased a two-bedroom two-bathroom unit:

2014_TQ1 - Without and Without Furniture

It is important that a specialist quantity surveyor prepares a tax depreciation schedule for an investment property before the owner lodges their tax return. A quantity surveyor will carry out an inspection on the property to identify more plant and equipment items and apply depreciation legislation to maximise depreciation deductions for the owner.

BMT Tax Depreciation complete reports for over 10,000 accountant referrals each year, with reports showing an average of $5,000 to $10,000 as a first full year deduction.

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For further information on depreciation, property investors can visit BMT Tax Depreciation’s What is Depreciation page.

– Bradley Beer is the managing director of BMT Tax Depreciation. A depreciation expert with over 16 years experience in property depreciation and the construction industry.

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Outdoor & Exteriors RENO ADDICT

How to save money by claiming deductions on what’s outside

When it comes to claiming depreciation on investment properties, many investors are unaware of the deductions available on outdoor structures, fixtures and fittings.

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Items outside a building can add value to a property. Rather than ignoring the street appeal, investors can include items in the yard or outdoor area to help attract potential tenants. The investor can then maximise their deductions by claiming depreciation on the eligible items in the front yard, backyard and on the balconies of their properties.

Deductions can be claimed on these outdoor assets as either capital works allowance or plant and equipment depreciation.

Capital works allowance, also known as building write-off, is based on the historical cost of a structure, excluding the cost of plant and non-eligible items. Outdoor structures which qualify for the capital works allowance include:

BMT Tax Depreciation ~ Outdoor Appreciation Increases Depreciation ~ 09.12

Plant and equipment items, including removable or mechanical assets, are also eligible for depreciation deductions. Each plant and equipment item has an effective life set by the Australian Taxation Office.

The depreciation available on each item is calculated using the effective life. Some depreciable outdoor plant and equipment items commonly found outside a property include:

BMT Tax Depreciation ~ Outdoor Appreciation Increases Depreciation ~ 09.12 (2)

Assets outside a property can be worth thousands of dollars. Investors should take special notice when old assets including retaining walls, garden sheds and driveways are removed and replaced during a renovation. They may be entitled to claim 100% of the unclaimed value as a deduction. A specialist quantity surveyor is qualified to calculate values and construction costs of these items and can ensure that investors are not throwing dollars away.

— Bradley Beer is the managing director of BMT Tax Depreciation. A depreciation expert with over sixteen years experience in property depreciation and the construction industry.