BMT Tax Depreciation, Australia’s leading provider of depreciation schedules, says investment property owners are making three costly mistakes on their tax returns when it comes to depreciation. Check whether you’re making these common tax mistakes by investment property owners.
Property investors can claim sizable tax deductions for the natural wear and tear that occurs to a building and its fixtures and fittings over time. These deductions are known as property depreciation.
Specialist quantity surveyors are one of the few professionals recognised as having the skills to estimate construction costs for depreciation purposes. Yet many people fail to engage one and miss out on claiming valuable dollars back at tax time.
Expert quantity surveyor and CEO at BMT Tax Depreciation, Bradley Beer, has revealed the three most common depreciation errors he sees.
1. Using the wrong depreciation category
BMT says there are two types of depreciation deductions: capital works (Division 43) and plant and equipment (Division 40). Beer says, “It’s often not immediately clear which category an item belongs to, and in some cases an asset can be split between both.”
Check that you’re claiming everything you can, and under the correct depreciation category.
Capital works are claimed for the wear and tear of a building’s structure and the items permanently fixed to the property, such as doors and windows. They are typically depreciated at an annual rate of 2.5 percent over 40 years.
Plant and equipment items are those that can be easily removed, and include things like blinds, hot water systems and furniture. The condition, quality and effective life of the items will determine the allowances available for a plant and equipment asset.
“Many investors mistake floating timber flooring for a floor that’s permanently fixed to the building. They then claim a capital works deduction when the floor is actually removable, making it a plant and equipment deduction. “This could mean the difference between $250 and over $1,300 in first year deductions,” explains Beer.
2. Not claiming depreciation on older properties
Research proves that new properties hold the highest depreciation deductions, but many people mistakenly think that depreciation can’t be claimed on older properties.
Legislation introduced in late 2017 means that depreciation of second-hand plant and equipment assets can no longer be claimed. Yet capital works deductions remain unaffected and make up the bulk of a depreciation claim on an investment property, regardless of whether it is new or second hand.
Second-hand property owners can still claim depreciation on all qualifying capital works deductions that, on average, make up 85-90 percent of the total claim. They can also claim all new plant and equipment assets they purchase for the property.
3. Overlooking deductions you can claim
The third of the tax mistakes by investment property owners is that many depreciation deductions are easily missed by the untrained eye, especially on assets that have been installed by others. Substantial renovations where all, or substantially all, of a building is removed or replaced can hold significant deductions. Even when completed by a previous owner.
“Some examples of substantial renovations include replacing foundations of the building, walls, floors, the roof or staircases,” says Beer. “These renovations can hold tens of thousands of dollars in deductions for the new owner.
“Property investors should look to contact a specialist quantity surveyor for advice on what deductions are available for their individual circumstances.”