Property depreciation is a non-cash tax deduction available to the owners of income producing properties.
As a building gets older, items wear out – they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a tax deduction.
Investment properties both new and old can attract depreciation deductions.
The Australian Taxation Office (ATO) clearly defines two types of depreciation allowances available for property investors:
Division 43 capital works allowance
Division 40 plant and equipment depreciation
The capital works allowance refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.
Plant and equipment depreciation on the other hand, refers to the deductions an investor can claim for the wear and tear that occurs to the easily removable fixtures and fittings found within the property.
Investors often wonder about the depreciation differences of older properties compared to new properties. The simple answer is that the owners of newer properties will receive higher depreciation deductions. However, investment properties both new and old can attract depreciation deductions for their owners.
Capital works deductions are calculated at a rate of 2.5 per cent of the structural costs of a building and can be claimed per year for forty years. Construction costs generally increase over time, making building write-off deductions on new buildings higher.
Owners of older properties can claim the residual value of the building up to forty years from construction. For example, if an investment property is five years old, the owner will have thirty five years left of capital works deductions to claim.
Capital works deductions are governed by the date that construction began. Any property that was constructed after the 15th of September 1987 attracts capital works deductions. If your property was constructed prior to that date, you should still contact BMT as you can claim for any renovations that the property has undergone, including those that were carried out by previous owners.
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Under legislation passed on Wednesday 15th November 2017, owners of second-hand residential properties (where contracts exchanged after 7:30pm on the 9th of May 2017) are no longer eligible to claim depreciation on existing plant and equipment assets, such as air conditioning units, solar panels or carpet. However, owners of these properties can still claim depreciation on the plant and equipment assets they purchase for their property.
There has been no change to capital works deductions, which generally account for anywhere between 85 and 90 per cent of a claim. The good news is that this means Australian property investors can still claim thousands of dollars in deductions.
Additionally, if you purchased a property before 7:30pm on the 9th of May 2017, you can continue to claim as before.
It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation. Each and every BMT Tax Depreciation Schedule will be tailored to suit an individual’s property investment scenario, ensuring that all deductions are maximised.
Article provided by BMT Tax Depreciation. Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
* Under legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand-new property will still be able to claim depreciation as they were previously. To learn more visit www.bmtqs.com.au/budget-2017 or read BMT’s comprehensive White Paper document at www.bmtqs.com.au/2017-budget-whitepaper.