WITH the end of the financial year upon us, Peter Foldes of Washington Brown, answers the most common questions about tax depreciation and reveals why it is so important to have a depreciation schedule done for your investment property.
What is a depreciation report/schedule?
It’s a document which outlines the legal tax deductions you are able to make on your investment property in relation to wear and tear.
It will assess depreciation in the value of plant & equipment and the structural component of a property.
“If you could lift the property upside down and give it a shake, anything that falls out is typically plant & equipment,” Foldes says.
“The structure is the concrete, the bricks, the timber. Many people don’t realise this also includes the internal structure, so things like cabinetry or tiling within the premises itself.”
How does a report benefit me?
The report is used by your accountant to determine your tax deductions and to ensure you are claiming the maximum allowable deductions on your investment property.
It reduces your taxable income which means you pay less tax and leaves more money in your pocket.
Hasn’t the legislation changed around depreciation?
There have been changes but Foldes says there are still plenty of deductions to claim.
With a new property purchased after May 9, 2017, which has not been owner occupied for any duration, you can claim depreciation on everything – plant & equipment and structure.
If built after 1987, you’re still eligible to claim deductions on the original structure (but not plant and equipment) until it is 40 years old.
“If your property was built before 1987 many accountants and property managers are telling clients no deductions are available, but I would urge you to contact us and we’ll happily produce a free estimate for you,” Foldes says.
He says it is very likely a house built before 1987 has had some modifications done since then, which means you can claim the renovations to the structural component.
“That can relate to thousands of dollars in deductions each year for a number of years.”
Does the quantity surveyor need to inspect the property?
Not always. Particularly with second-hand properties in which investors can no longer claim plant and equipment, as it may not be necessary.
Quantity surveyors can usually obtain floor plans, detailed photographs and all the information they need, so may not need to carry out a physical inspection.
How long does the process take at this time of year?
In the month to June, Washington Brown does about 30% of its yearly work, so it is a busy time for many quantity surveyors.
But Foldes says depending on whether an inspection is required and access, it usually takes about ten business days.
What information do you need?
“We’re not going to ask anything too tricky of you, but we do want to be thorough,” Foldes says.
If the property is new, the quantity surveyor will ask for the building contracts, the name of the entity that owns the property, purchase price or construction costs, floor plans, schedule of inclusions and the completion date.
“If clients do additional work such as landscaping or driveways, you simply need to provide us with the cost and description information for those additional works,” Foldes says.
With an existing property, a copy of the floorplan is helpful, ownership name, settlement date, purchase price, details of any additions and property manager’s details. Unit and townhouse investors should also provide a strata plan.
“This is all information that you have been provided with at some point during the purchasing process,” Foldes says.
When should I get a report done and how often?
Foldes says you should do it as soon as you buy an investment property, certainly within the first year of ownership, to ensure you’re not missing out on deductions.
He says some deductions can’t be rolled into the next financial year, so it’s important to get one done as close to buying as possible and the cost of the report is also a tax deduction.
“Our reports are fully comprehensive. So, they span the maximum duration that you are eligible to claim deductions for.”
That means unless you do a significant renovation, you will not need to have the report done again.
Should I choose the cheapest quantity surveyor?
Foldes says it’s important to choose someone who does the report correctly and maximises deductions and ensures it is ATO compliant.
Washington Brown will provide investors with an estimate of what they may be able to obtain in deductions obligation free, before an investor needs to commit to getting a report done.