In this year’s budget, Treasurer Scott Morrison announced surprise changes to investment property tax rules. In short, the government has clamped down on depreciation and travel allowances — two key write-offs for an estimated two million investment property owners.
Depreciation is a tax break for investors who own income-producing properties such as residential investment properties.
The Australian Taxation Office allows such investors to claim deductions for the wear and tear that occurs to a building’s structure and certain assets contained within it.
These deductions are split into two categories — capital works deductions for the structural features of a property such as the walls, floors and ceilings and plant, and equipment deductions for easily removable and mechanical assets such as carpet, hot water systems, blinds and stoves.
The government’s changes affect the second category of deductions — plant and equipment assets.
In the past, investors could claim depreciation for assets in this category for any property they purchased.
However, under the new rules, investors who have purchased second-hand residential properties after May 9 this year will only be able to claim depreciation for plant and equipment assets that they spend money on themselves.
Fortunately for investors, the budget notes were clear that existing investments will be grandfathered.
This means anyone who purchased a property up until May 9 will be able to claim depreciation as normal.
Investors will also still be able claim qualifying works deductions, including additional capital works carried out by themselves or a previous owner.
It is this group of items that represents the largest depreciation values.
It is estimated that on average, 88 per cent of a typical residential house is made up of the building structure and fixed assets, while the remaining 12 per cent pertains to the removable plant and equipment items.
It is important to be aware of these rules if you are completing your tax return online this year as it could be the difference between thousands of dollars in deductions and tens of thousands.
The legislation will be in force from today.
In light of these changes, it is as important as ever that investors understand depreciation and use it to maximise the cash flow they generate from their property portfolio.
With this in mind, here are six common items that can be depreciated in many investment properties, but a surprising number of investors seem to have little appreciation that these deductions are available:
Garbage bins: A bin that cost $250 could attract a $250 deduction in the first full year, as it is valued under $300, which qualifies the asset for immediate write-off.
Closed circuit TV system: A CCTV system may improve household security and can attract a first-year deduction of $775.
Garden shed: A shed valued at $855 could attract a first-year deduction of about $160.
Smoke alarms: If an investor spends $280 on a smoke alarm, this will also qualify for an immediate write-off and attract a $280 deduction in the first full financial year.
Hot water system: A system that cost $1860 could allow a $310 first-year deduction.
Carpets: In an average house, carpet that cost $3650 could attract a first-year deduction of $730, while carpet in an two bedroom apartment that cost $2180 could attract a $436 deduction.
The ATO currently lists thousands of depreciating assets in Tax Ruling 2016/1 and provides the effective lifespan for each of these items over which their full depreciable value can be claimed by their owners.
The government’s changes will likely reduce the amount of deductions investors will be able to claim on second-hand residential properties.
In light of the confusion surrounding the changes, investors should give serious consideration to using the services of a specialist quantity surveyor and to familiarise themselves with depreciation schedules.
The ATO recognises quantity surveyors as one of only a few professions that possess the required construction costing skills to calculate the cost of items for the purposes of depreciation.
Quantity surveyors inspect a property and produce a tax depreciation schedule for investors that typically highlights all assets that can be depreciated, while at the same time ensuring they are depreciated at the correct rates and in the right categories.
Investors then use these schedules when submitting their annual income tax assessment. Tax depreciation schedules often mean larger claims, less hassleand ensures deductions are compliant.
The cost of the schedule is 100 per cent tax-deductible.