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How Depreciating or Writing Off Older Equipment and Building Assets Works?

A major mistake that many investment property owners often make, is that they presume a few things about their property. One of those presumptions is they think their property was built years ago, so there will be no depreciation tax benefit. As per law, the capital works component of the property is eligible for the claim on properties where construction began post-September 15, 1987. Two vital elements come under consideration while calculating depreciation that may include capital works deduction and plant and equipment.

Given below are some crucial aspects that you should not overlook when it comes to depreciation:

1) Capital Works Deduction:

This refers to the structure of the building or any fixed items. It will include some items that will be categorised as capital works while computing depreciation deductions. These items are kitchen cabinets, windows, doors, walls, bathtubs, external decking, etc. And, you may calculate depreciation for structural items at a 2.5 percent rate per year for 40 years. It may start from the construction start date and as long as it started after September 15, 1987. Meanwhile, properties built before 1987 often underwent a few renovations. Older property owners will discover that they are still eligible for capital works deduction for renovation concluded within the enacted date. It does not matter if they were concluded by a previous property owner. Therefore, it is necessary to calculate rental home returns.

2) Plant and Equipment Assets:

These may include those items that can be removed in a convenient manner from the property. It may include smoke alarms, carpet, door closers, ovens, AC, light fittings, shower curtains, etc. A whopping 1500 items have been recognised as depreciable plant and equipment by ATO. The age of these items remains insignificant while calculating depreciation deductions available for a property owner. Every item has been allocated an individual effective life and rate of depreciation through which deductions shall be calculated. It is vital to obtain a tax depreciation schedule for rental property.

3) Old vs New Depreciation:

Let us comprehend the difference that a depreciation claim may make for owners of new, old and just built investment properties. Let’s suppose all properties bought at $4,60,000. The depreciation for properties of similar price and age may differ. It will depend on the size of the property, the number of plant and equipment assets in the property. Further deductions shall be applicable if there is some additional works or renovations carried out. The owner of a just constructed unit or home will get higher deductions than the owner of the old residential unit built after 1980. In the first financial year, the owner of the old residential house is eligible to claim $3,298 in depreciation. Meanwhile, the owner of the old residential unit may claim $3,846. After 5 years period, the owners of these properties shall get $12,357 and $13,576. These have emerged as substantial deductions that the owner of an old property must not overlook.

Conclusion:

The above points will help in depreciating older equipment or building assets. You must remember that if you destroy your current kitchen for upgrading to a new one, you may claim the existing items. You can seek the help of a quantity surveyor who may help you carry it out with a property depreciation schedule. For instance, rather than depreciating the old kitchen estimated at $4000 in the next 4 years, you are eligible to claim $4000 right away. They can also help you obtain the latest depreciation schedule for a new kitchen that can be claimed for 40 years.

Can Depreciation on My Rental Property Be Back-Claimed?

Several property investors are not fully aware of the tax benefits they can claim from their rental property. As per ATO rules, a certified quantity surveyor can help such investors reduce their tax burden. This is on account of the depreciation on their property every year. A quantity surveyor can help them make a detailed tax depreciation schedule for rental property. This would then help reduce their taxable income. As a result, the annual tax also gets reduced. Were you aware of this? If so, then you must be claiming the due depreciation tax benefit every year. But things not stopped here. Let’s say you missed claiming the depreciation on your rental property in some previous year. You might have given up that tax deduction as lost forever. But that is not correct. You can also back-claim your depreciation benefits on rental property. Read all about it here.

How Many Years Are Back-Claims Permitted?

This would have been the first question in your mind by now. The ATO has different sets of rules for different categories of taxpayers. If you are an individual taxpayer or the owner of a small business, then you can back-claim missed returns of the last two years. For other categories of taxpayers, this period is four years. For all these periods, the date of calculation is important. ATO guidelines state that the date of notice for tax assessment is the date from when the period is considered. In case you haven’t got any notice, then the date you filed your incomplete return is considered. Also, for the same period, you can submit more than one request for amendment.

The Process for Back-Claim of Previous Years

The process begins with a simple request for amendment made to the ATO, which is free of cost. After that, you need to wait for the ATO to send you the notice for submitting the amended return. While you wait, you should get your amended rental property depreciation report readied. The ATO website does provide all details for you to do it. But you should get this done by a certified quantity surveyor or at least consult your tax accountant. That way the chances of errors are minimised.

A Review of the Entire Process

Now that you know that a couple of years of delay can be corrected, you need to understand the complete picture. ATO rules allow you to claim tax relief on account of depreciation. Depreciation is the annual reduction that your rental property suffers. This is a normal accounting principle. You can claim depreciation for both fixed assets and other fixtures and fittings.

Conclusion:

You may have submitted incomplete rental home returns in previous years. It could be simply because you didn’t know about it or you might have missed it. All it means is that you paid a slightly higher tax that year. But that mistake can be easily corrected. You can back-claim for two to four years, depending on what type of taxpayer you are. Get in touch to learn more and speak to one of our professional team members for more insight.

Why the Depreciation Shake-up Gives Off-the-plan Investors an Edge at Tax Time

The year 2017 saw some changes brought about in the rules governing depreciation on investment property in Australia. The attractive option for claiming tax deductions due to the depreciation of the property value saw a cutoff date being applied – 9th May 2017. People who bought a second-hand property after date could no longer claim the deductions, as per the ATO regulations.
An Overview of Depreciation

We know that any asset undergoes wear and tear as it continues to be used. Accounting principles look at this reduction as a standard percentage of the value which gets reduced from the value of the asset. Under tax laws, this depreciation amount could be set off as a deduction from the tax payable. This would make a substantial change in the cash flows of a property owner. Based on the cost of the property, maintenance costs, reduction in value, and the reduction in tax payable, the depreciation could impact the net yield on investment property.
The New Tax Law

From May 9th onwards in the year 2017, second-hand property purchased would not attract the tax deduction. The only two categories allowable were new assets added to older homes and assets in new homes would allow admissible deductions. Those who were off this new plan could continue to claim under old rules. Also, capital works investments and fixed items added could still be claimed. But any assets that came along with the property went out of the purview of the deduction.
The Better Option between New and Second Hand

Because of this change, property owners needed to rethink their investment strategy. Back of the envelop calculations seem to present a clear picture. It was seen that a new property could work out much cheaper than investing in an older property of the same value. The detailed working of the investment property depreciation schedule ATO would provide a similar answer. What this does is to take the tax benefits out of the equation. So an investor should look at the cost-benefit analysis of the property only. Tax deduction benefits would cease to make a difference to the numbers. So how do the new tax rules affect the comparison between old and new? A property purchased in 2016 might turn out to be of similar value to a brand new property purchased in 2018. This needs investors to recalibrate their calculations carefully and in advance.
Conclusion:

In order to get the best property investment returns, an investor would need to calculate carefully. The best way is to leave it to the professionals. Consultants like Deppro could depute their qualified quantity surveyors to get the math right. They would set up the depreciation schedule according to the purchase date. The ATO has detailed lists of what can be claimed and for how much. These quantity surveyors would work out the numbers in accordance with these ATO guidelines. The amount that such a report would cost could ensure savings of higher amount if the calculations are done by a professional.