According to the Australian Taxation Office there were approximately 2.8 million property investors in 2012-2013 income year.
A large number of these property investors claimed “Capital Works Deduction” (Div 43) and “Capital Allowance” (Div 40), or more commonly known as Depreciation.
However as a Tax Agent I have come across a fair number of property investors who do not claim depreciation! They are happily surprised as to how much extra non-cash deductions they can claim when this is explained to them.
I decided to write this short blog giving a quick explanation as to the potential tax savings and cash flow improvement if this deduction is claimed in your tax return. After all you are entitled to it!
The amount of depreciation that can be claimed will be dependent on a number of factors including but limited to:
- Age of the building – the more recently the building was built the higher potential depreciation there will be especially for Division 40 (Capital Allowance)
- Cost of the building – the more it cost to build the higher the potential depreciation
- Type of building and zoning – whether the building is residential, commercial or intended for a specific purpose (e.g. manufacturing) will depend on which rules need to be applied
- Prime Cost or Diminishing Value – the type of method of depreciation you choose to claim will have an impact on whether you claim more depreciation now or even it out throughout the life of the building
- Renovations – if the property has been renovated or additions made to the property will give a potential increase in the amount of depreciation which can be claimed.
So how much of a deduction can you claim?
Below is a very simple example:
Let’s assume that it cost $200,000 to build a 150sqm house comprising of:
– $170,000 of building itself and,
– $30,000 of other assets (blinds, fixtures and fittings, appliances etc..)
The Capital Works Deduction on this property (2.5% of the building cost) would be $4,250 per year. The Capital Allowance (the other assets) would be a more complicated calculation (different percentages for different items) however we’ll assume it came to $3,800 in the first year.
So in the first year the property investor has the potential to reduce his/her assessable income by $8,050 reducing their tax liability and increasing their cash flow!
Now that’s worth claiming!
The best way to be able to claim this deduction is to obtain a Depreciation Schedule from a Quantity Surveyor.
The Quantity Surveyor will assess the investment property and calculate the potential depreciation from both Division 40 and 43. Providing the property investor a report (Depreciation Schedule) that will last for the next 20 to 40 years!
The fee you pay them to prepare the report is also tax deductible!
If you need any help with your tax return and claiming the right amount for your investments please do not hesitate to contact our team at DKM Accounting & Taxation Services Pty Ltd we will be happy to assist with all your taxation needs.
The information contained in this blog is of a general nature only and does not constitute professional advice. We recommend that you seek professional advice in relation to your particular situation and circumstances.