Tax deadline is looming. Property investors should take care to ensure deductions are claimed correctly.
With October 31 fast approaching, around 1.8 million Australian’s (approximately 8 per cent of the population) will be in a rush to ensure they lodge their income tax returns in time.
Before completing their tax returns, property investors should be careful to ensure their deductions are claimed correctly.
In the lead up to the end of financial year, a number of warnings were issued by the Australian Taxation Office (ATO) which suggested property investors should be careful when lodging their claims.
Key aspects the ATO advised they will be checking are excessive deductions for holiday homes, husband’s and wives who split rental income and deductions for jointly owned properties, claims for repairs and maintenance shortly after a property has been purchased and claiming deductions for the period a property is rented or genuinely available for rent.
To help property investors to ensure their deductions are claimed correctly, here are four key aspects and tips to watch for when claiming depreciation on an investment property:
1. Properties available for rent for part of the year should only be claimed for that portion
Rental property owners should only claim deductions for the periods their property is rented out or that it is genuinely available for rent. Holiday home owners in particular must be careful to ensure deductions are claimed correctly.
Ensuring deductions are claimed for the portion of the year a property is income producing or available for rent can easily be resolved by requesting a tax depreciation schedule. A BMT Tax Depreciation Schedule will outline deductions from the date of settlement and will only include the deductions available for the remaining part of the year.
2. Claim capital works and plant and plant and equipment deductions correctly
Investors who lodge self assessed deductions often make the mistake of incorrectly allocating plant and equipment assets as capital works deductions or classifying plant and equipment items as capital works.
This can result in two issues for investors. Firstly they could over claim, resulting in unwanted attention and risk of being audited by the ATO. Secondly they could under claim, missing out on the maximum deductions available.
These mistakes generally occur because investors do not have the knowledge of depreciation legislation necessary to separate items appropriately and they have not sought adequate advice or requested a tax depreciation schedule.
Capital works items represent the structural component of the property, including fixed items. Examples include walls, roofs, doors, windows, kitchen cabinets and decking. In residential properties, capital works deductions for these items can be claimed at a rate of 2.5 per cent for forty years for buildings in which construction commenced after the 15th of September 1987. If any renovations have occurred within legislated dates, capital works deductions may still apply for the owner, even if these renovations have been completed by a previous owner.
Plant and equipment assets are considered items which are easily able to be removed from an investment property. Examples include ovens, dishwashers, carpets, light fittings, air conditioning units, freestanding gas heaters, garbage bins and even shower curtains. Unlike capital works, the age of an item does not affect plant and equipment deductions. Each asset is assigned an individual effective life by the ATO.
To ensure that deductions are correct and maximised, a specialist Quantity Surveyor will complete a site inspection as part of the process of arranging a depreciation schedule. This inspection allows a depreciation expert to take photographs and note every asset within the property. They will also perform the necessary searches to find any details required to estimate construction costs, including those for any renovations which have occurred. A depreciation schedule will outline all deductions available for capital works and separately itemise all deductions for plant and equipment items.
3. Understand the difference between repairs, maintenances and capital improvements
Investors often get confused when claiming expenses for repairs and maintenance versus capital improvements. The reason being is that deductions for repairs and maintenance are claimed differently to capital improvements.
The ATO provides clear guidelines to help investors to understand the difference and make sure they claim these deductions correctly.
Repairs (work completed to fix damage or deterioration such as fixing part of a fence damaged in a storm) and maintenance (work completed to prevent deterioration to a property such as oiling a deck) should be claimed as an immediate deduction in the year an expense occurred. However, any capital improvements (work which improves the condition or value beyond its original state at the time of purchase) must be depreciated and claimed as a capital works deduction or as plant and equipment depreciation.
If a property investor plans any work to their income producing property, they should consult with their specialist Quantity Surveyor prior to commencement to discuss the implications this may have to the deductions they can claim.
If completing a renovation or replacing assets, any items removed may have remaining depreciation available. If so, the owner is entitled to claim the remaining depreciable value as an immediate write-off in the year the item is scrapped and removed.
After any capital improvements are made, if an investor has an existing schedule, they should have it updated to include any newly installed items to maximise future claims.
4. Co-owners should ask for a split depreciation schedule
Often property owners purchase a property with a friend or colleague. Many co-owners make the mistake of calculating depreciation and then splitting the deductions based on ownership percentage. However, depreciation legislation allows co-owners to split an assets value by ownership percentage first, potentially qualifying them for higher rates of depreciation.
Ask for a split depreciation schedule to ensure that deductions are outlined based on each owners interest in the assets contained within the investment property.
If you’re preparing your tax return, the most important advice is to seek adequate advice from an expert. Quantity Surveyors are recognised by the ATO as one of a few professionals with the necessary knowledge to calculate construction costs for depreciation purposes.
Alongside your Accountant, specialist Quantity Surveyors can provide guidance to steer you on the right path to ensure your claim is correct. Seeking the advice of an expert and requesting a depreciation schedule will not only ensure you claim the maximum legitimate deductions available, it will also provide you with the added security of having the adequate evidence necessary should the ATO perform an audit of your claims.
Article provided by BMT Tax Depreciation.