|One-Bedroom City Apartment||Without Depreciation||With Depreciation|
|Rental Income (per annum)||$28,600||$28,600|
|Less Mortgage (per annum at 5%)||$27,000||$27,000|
|Less property expenses (per annum at 1.5%)||$7,500||$7,500|
|Less depreciation in first year||–||$14,000|
|Tax loss/ your tax deduction||-$5,900||-$19,000|
|Annual refund based on 37% tax rate||$2,183||$7,363|
|Monthly refund if applying for PAYG variation||$181||$613|
Source: Claim it! A property investor’s guide to depreciation, Tyron Hyde
Depreciation is a tax deduction available to property investors in Australia. It is a concept that is often regarded as confusing and complex by property investors, but it can be simplified.
Any item or activity that earns you an income can be taxed – and thus has various tax deductions attached to it. When it comes to property investment, you earn income in the form of rent. This ultimately adds to your taxable income, but also enables you to make various claims and deductions.
Depreciation, however, is a non-cash deduction. It’s not based on purchasing something, keeping a receipt and claiming it to reduce your taxable income. Instead. Depreciation relates to claiming the wear and tear of your investment properties over time.
The concept is not as complex as it first appears. Buildings, and indeed their plant and equipment, become worn out over time. They lose value and will eventually need to be replaced. As the owner of the property, you are entitled to claim deductions for this decline in value.
When it applies
Many investors who own older properties believe they aren’t entitled to claim deprecation, or that the effort won’t translate into sizeable deductions, according to director of Washington Brown Tyron Hyde.
He says they couldn’t be more wrong.“There’s so much more to depreciation than people realise,” he says. “There are two main components to it. Firstly, there is the structure of the building. If it’s built after 1987, you can claim 2.5 per cent per annum of the construction cost against your taxable income.”
My Hyde says it doesn’t matter if the previous owners, or even a developer, initially paid for these construction costs. The property is yours now and its value is declining in your name – therefore, it’s yours to claim.
“The second component is what’s called ‘plant and equipment’, which refers to the items that can be removed easily,” he continues. “You can claim depreciation on those items as well – things like ovens and dishwashers. They depreciate quicker and have varying rates.”
What it applies to
Most property investors are aware they can claim depreciation on items such as carpet, blinds and hot water systems, according to BMT Tax Depreciation’s managing director, Bradley Beer. However, he says there are “more obscure plant and equipment items” that often slip under the radar of even the most astute property investor.
Mr Beer says many investors who buy into an apartment complex don’t realise they also effectively ‘own’ part of the common areas.
Mr Hyde agrees and says the most commonly missed depreciable items for investors can be found in apartment complexes.
“The number one thing people don’t realise they can claim is common property items,” he explains. “A lot of investors are generally shocked when they realise that when they buy into a high-rise apartment, they are actually buying a portion of the lift, buying a portion of the sprinkler systems or the fire extinguishers in the common property.”
Legally, investors are able to calculate their own deductions in relation to depreciation based on estimates.
My Hyde, however, says investors who aim to undertake ‘DIY depreciation’ are likely to miss out on possible deductions.
“Regardless of the technicalities of the law, I would argue you’re missing out on deductions by attempting to DIY,” he says.
“There is legislation that says investors are able to estimate their deductions under the self-assessment rule, but I would never recommend that,” says Mr Mortlock, director of MCG Quantity Surveyors.
“There are two major problems with DIY depreciation. The first is that by doing it yourself, you’re basically ticking a big invisible box on your tax return that says ‘Would you like to be audited?’ The other part of it is if you don’t know what you’re looking for you can miss potential renovations that might have been done prior to you owning the property. Sometimes accountants will do it for their clients or investors will do it themselves, but to avoid being scrutinised they estimate a very normal, conservative, safe value. They try to sneak under the radar by estimating low costs”.
Mr Beer says some investors attempt to undertake DIY depreciation because they had previously incorrectly assumed their accountant takes care of it.
“You’ll often hear investors say ‘Doesn’t my accountant look after that?’ They think the accountant does it as part of their tax return,” he says.
“If they DIY they are effectively making a guess. They can put it on their tax return but generally their guess will be conservative because they don’t really know the rules. If they get audited from a compliance perspective, the tax office will ask them what they based the costs on and how they calculated the construction. ‘Guessing’ doesn’t really stack up when it comes down to it.”
Vivienne Kelly, Smart Property Investment, February 2014 issue
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