Tag: tax

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RENO ADDICT

Tax: Landlords can’t claim depreciation under new legislation

Image source: nine.com.au

By Bradley Beer

In one of the most dramatic changes to property depreciation legislation in more than 15 years, Parliament passed the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 before Christmas, with the Bill now legislation.

The new legislation means owners of secondhand residential properties (where contracts exchanged after 7.30pm on 9 May 2017) will be ineligible to claim depreciation on plant and equipment assets, such as air conditioning units, solar panels or carpet.

Image source: nine.com.au

The good news is that there are still thousands of dollars to be claimed by Australian property investors, as there has been no change to capital works deductions, a claim available for the structure of a building and fixed assets such as doors, basins, windows or retaining walls. These deductions typically make up between 85 to 90 percent of an investor’s total claimable amount.

Previously existing depreciation legislation will be grandfathered, which means investors who already made a purchase prior to this date can continue to claim depreciation deductions as per before.

Investors who purchase brand new residential properties and commercial owners or tenants, who use their property for the purposes of carrying on a business, are also unaffected.

Owners of secondhand properties who exchanged after 7.30pm on 9 May 2017 will still be able to claim depreciation for plant and equipment assets they purchase and directly incur an expense on.

To read more about the new depreciation legislation and how this applies to a range of property investment scenarios, download our comprehensive white paper document Essential facts: 2017 Budget changes and property depreciation.

It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation.

–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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RENO ADDICT

Buy property with friends and increase your tax deductions

The pool

Co-ownership is becoming an increasingly popular trend. Owning a property with others can provide improved purchasing power. This can be particularly useful in capital cities where it can be difficult to break into the property market.

It can also balance out the expenses of owning an investment property including ongoing repairs, maintenance and fees. Additionally, co-ownership can provide improved depreciation deductions, allowing more items to be depreciated at a higher rate. This is where a BMT Tax Depreciation split report can assist.

How does a split report work?

A split report calculates depreciation deductions based on each owner’s percentage of ownership for each asset. This involves splitting the value of the assets based upon each owner’s interest in the assets before applying depreciation rules.

In a scenario where there is just one owner, legislation allows property investors to claim an immediate write-off for assets with an opening value of $300 or less. However, when an investment property is co-owned by two parties with a 50:50 ownership share, a split report allows the owners to each claim an immediate write-off for items where their interest in the asset is below $300. This means the owners can claim an instant write-off for items which are less than $600 in total value.

The same method can be used when applying low-value pooling. Where an owner’s interest in an asset is less than $1,000, these items will qualify to be placed in a low-value pool. This means they can be claimed at an increased rate of 18.75 per cent in the first year regardless of the number of days owned and 37.5 per cent from the second year onwards.

In a situation where ownership is split 50:50, by calculating an owner’s interest in each asset first, the owners will qualify to pool assets which cost less than $2,000 in total to the low-value pool.

Distributing the value of assets based upon the percentage of ownership first will increase the number of assets which investors are eligible to claim an immediate write-off or low-value pooling for. As a result, the rate at which depreciation deductions can be applied will be accelerated and the owners will receive increased deductions in the earlier years of ownership.

BMT’s split reports simplify this process and allow owners to get more from their investment. Each split report can also be provided in CSV format for easy importing into accounting software.

There is an option for owners who prefer a depreciation schedule without any split applied should this be required.

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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Bathrooms Kitchens RENO ADDICT

How to: Add value and increase deductions when renovating

Contemporary Kitchen

Australians have always had a passion for renovating property and recent predictions on renovation spending for 2016 suggest this trend will continue.

Data from the Commonwealth Bank Future Home Insights Series forecasts that renovation spending will top $32 billion in 2016 alone. This equates to 36% of total spending on residential construction for detached houses including alterations and additions.

Similarly, a report from the Housing Industry Association estimated that around 213,000 kitchens and 429,400 bathrooms were installed in Australia during the 2015-2016 financial year.

Contemporary Kitchen

While these predictions demonstrate that owners are not afraid to spend money to improve the value of their homes and rental properties, often property investors may not be aware of the implications that renovations will have on their depreciation deductions.

Whether an investor updates a kitchen, bathroom or simply replaces the carpets or hot water system in a property, the removal of these assets will affect a depreciation claim.

Renovations affect depreciation deductions in two ways. Firstly, an investor should note that any items removed may have a remaining un-deducted depreciable value which they are entitled to claim when the item is removed.

This process, known as scrapping, allows investors to claim the total remaining depreciable value for items which are thrown away in the year of their removal.

Investors must also factor in deductions they can claim for new items they add to the property.

Assets will be captured by a depreciation specialist during a pre-renovation inspection. After the renovation is completed, a new depreciation schedule is then prepared listing all new additions that have been added and the existing depreciable items which will remain in the property.

To show how depreciation deductions are affected during a renovation, lets look at the following example.

An investor purchased a property one year ago. Originally constructed in 1992, the property was beginning to show signs of wear and tear. Upon purchase, the investor rented out the property and engaged BMT Tax Depreciation to prepare a depreciation schedule. After owning the property for twelve months, the investor decided to install a new kitchen to improve future rental income and increase the equity held in the property. Outlined in the owner’s original existing depreciation schedule were items discovered during the first site inspection including a stove, blinds, light fittings, a rangehood, a dishwasher, a sink, tiled floors, cupboards and joinery.

The tables below show the original value of items and the depreciation deductions that could be claimed in the first full financial year. They also show the remaining un-deducted value of items after the first year’s claim was made.

2016_ta374_scrapping_tableThis investor could claim $780 for plant and equipment depreciation and $146 in capital works deductions, a combined total depreciation deduction of $926 in the first full financial year for the kitchen alone.

They can also claim the remaining un-deducted value of $3,010 for plant and equipment and $2,336 for capital works for items removed and scrapped during the renovation in the financial year of their removal.

BMT found that the newly installed kitchen would result in $1,611 in deductions for the owner in the year it is installed. Therefore a total of $6,957 could be claimed for the removed assets and the depreciation of the new kitchen.

Additional depreciation deductions are also available for structures and assets found in the rest of the property.

To avoid throwing thousands of dollars away in existing items and to ensure deductions for new items are captured it is essential to speak to a quantity surveyor before you start your renovation.

For more information please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.

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

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RENO ADDICT

Unfurnished versus furnished properties and depreciation

When an investor first decides to put their property up for rent, often they will weigh up whether it is better to rent the property unfurnished or furnished.

Making this decision will largely depend upon the circumstances of the individual investor and the type of property they are renting. There is however a number of advantages and disadvantages an investor can take into consideration before making their decision.

Obvious disadvantages include the initial cash outlay an investor would need to spend to furnish the property.

On the other hand, furniture can make the property look much more appealing to potential tenants and help to reduce the time a property is vacant when untenanted due to the tenant’s ability to move in straight away. Furnishings may also increase the weekly rental value of the property.

One advantage investors don’t often consider when deciding whether to rent a property furnished or unfurnished, is the additional depreciation benefits these assets can generate above a normal depreciation claim.

Any removable plant and equipment asset entitles the owner of the property to depreciation deductions. These items are depreciated based on their effective life as set by the Australian Taxation Office (ATO) and the deductions claimed can make a significant difference to an investor’s annual cash flow. Some examples of plant and equipment items include dishwashers, ceiling fans, clothes dryers, garbage bins, curtains, blinds, light shades and furniture.

The following example helps to explain how depreciation is calculated for an investor who owns a property purchased for $420,000. The example shows the property owner’s annual cashflow without a depreciation claim versus with a claim for both a furnished and unfurnished property.

2015_TA445_Cash flow with, without, furnished dep schedule

As the above table demonstrates, whether the property is rented unfurnished or furnished, depreciation will make a significant difference to the property owner’s annual cash flow when compared to a situation where no depreciation is claimed at all.

In the scenario without depreciation the investor is paying out $79 per week. By claiming $11,500 in depreciation for an unfurnished property the investor will turn the loss to an income of $3 per week, while the depreciation claim of $16,500 for the fully furnished property will turn the loss of $79 per week into an income of $38 per week. Over a year, this represents a saving of $4,255 for an investor who rents the property unfurnished or $6,105 for an investor who rents the property furnished.

It is recommended that property investor’s always seek advice from a specialist Quantity Surveyor on the depreciation available for both structural items (capital works) and the plant and equipment assets a property contains. A specialist Quantity Surveyor will use their knowledge of ATO legislation to produce a tax depreciation schedule which ensures the maximum deductions are found for the property owner.

–Article provided by BMT Tax Depreciation. Bradley Beer (B. Con. Mgt, AAIQS, MRICS) 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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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.

bmt

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

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.

DSC_4949 Brad Beer Profile

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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Outdoor & Exteriors RENO ADDICT

How to earn money from your granny flat

The rise in popularity of granny flats can be attributed to two things: in part state-level legislative changes regarding secondary dwellings which aim to boost housing affordability in capital city areas and also because of their affordability and capacity to achieve high rental yields. Data from our depreciation schedules suggest that while the average granny flat will cost $121,000 to construct, the owners can usually achieve a 15% rental yield on this investment.

shutterstock_182798585

In order to maximise the benefit of this yield, it is important for granny flat owners to understand their depreciation entitlements. When a secondary dwelling is income-producing the owner is entitled to substantial deductions due to the wear and tear of the building structure and the plant and equipment assets contained, even if they are currently occupying the primary residence on the property.

Research conducted by BMT Tax Depreciation has shown that the average first year depreciation deduction for a granny flat is $5,288, accumulating to $23,713 in deductions over the first five years of ownership. Shared areas between the granny flat and owner-occupied property such as patios, pools and barbecues may also entitle the owner to additional depreciation deductions, claimed based on the tenant’s usage percentage.

As each state or territory provides their own legislative requirements, including the land and plot sizes of a secondary dwelling or granny flat, the table below provides a summary to assist investors and also outlines the average first year depreciation deductions which can be found for properties of these sizes.

2015_T002 ~ Granny Flats
*The first year deductions in this example are based on an average claim for a property of this size. ** Deductions based on a 60m2 plot size. ***In QLD, VIC and SA granny flats cannot be used as income producing secondary dwellings.

Investors who are evaluating the cash flow potential of constructing a granny flat or a secondary dwelling on their property for rental purposes should speak with a specialist quantity surveyor for advice. They will be able to provide an estimate of the depreciation deductions which will become available once the property is available for rent. It is also recommended to speak with an accountant for advice on any of the capital gains tax implications of investing in a granny flat as there are a number of factors investors should be aware of if they ever decide to sell their home or subdivide the property later down the track.

Those who already own and rent a granny flat or secondary dwelling should also obtain a tax depreciation schedule from a specialist quantity surveyor which outlines the depreciation deductions they will be able to claim when they visit their accountant to perform their annual income tax assessment.

To learn more about tax depreciation for any investment property, visit the BMT Tax Depreciation website. Alternatively, for obligation free advice, 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.

Young_Couple_WithLaptop_Sstock_142453459

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.

2014_TAJ1---Bedroom-&-bathrrom-infographic

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.