Over recent years, the ATO has paid growing attention to tax returns submitted by tax payers relating to investment properties.
It is therefore highly likely that the Australian Taxation Office will pay particular attention to tax depreciation reports for investment properties when property investors submit their tax return from 1 July.
In particular, they may pay particular attention to tax depreciation reports that are prepared without a physical inspection of the property.
Unfortunately, a growing number of tax deprecation companies are not undertaking physical inspection of properties to cut costs and this failure could result in serious problems for their clients if they are audited.
If you are a property investor and plan to visit your tax accountant regarding your tax return from 1 July, you should raise the issue of tax depreciation and obtaining an ATO compliant tax depreciation schedule for your property or properties.
It is important to raise with your accountant the fact that desktop estimates of potential tax depreciation benefits are not accepted by the ATO and that a physical inspection of the property is required.
Accountants need to protect the interests of their clients by ensuring that the tax deprecation company they recommend to their client, conducts a physical inspection of the property.
The same principle applies to other professionals related to the property sector such as mortgage brokers who refer their clients to a tax deprecation company. Similarly, they should check if the tax deprecation company undertakes a physical inspection of the investment property before making a referral.
This is a simple check but one which could ensure that their client does not have to pay substantial penalty fees imposed by the ATO because the tax deprecation report is not compliant.
Overall, it is still unfortunate fact that a large number of tax payers who own investment properties will collectively miss out on millions of dollars in tax depreciation benefits over the coming weeks simply because they do not correctly claim them through lack of knowledge.
DEPPRO estimates that only one in five residential investors make use of the tax depreciation entitlements which are available to all investors on all investment properties.
Many property investors who have owned their properties for several years and have not undertaken a tax depreciation schedule still have the potential to claim back thousands of dollars in tax depreciation benefits.
A depreciation schedule can be undertaken at any time by a property investor. If you own a property for a number of years, you can still undertake a depreciation schedule and put in an adjusted tax return to enable them to obtain unclaimed tax depreciation benefits.
Most investors do not realize that tax benefits obtained through depreciation can be equivalent to 60% of the total purchase price of the property.
For a new apartment in a capital city, for example, this can equate to over $300,000 in possible tax benefits through depreciation.
You should engage the services of a tax deprecation company who will undertake an inspection of your property and provide you with an ATO compliant tax depreciation report which you can provide to your accountant.
This report is a ‘once off’ and will outline the amount of tax benefits you can claim on an annual basis. Anyone considering employing a tax depreciation company should ensure that they are a member of the Australian Institute of Quantity Surveyors (AIQS).
Obtaining a tax depreciation schedule that is compliant with ATO guidelines is a small investment that can deliver a huge financial return and boost cash flows during a time when rents throughout Australia are under downward pressure.