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

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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.

4 common rental property depreciation questions

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We answer rental property depreciation questions on a daily basis here at Deppro, and some have popped up more than others. If you’re new to the tax depreciation world, or just need a refresher to jog your memory, read on.

 

 

  • What’s the difference between ongoing and capital expenses?

 

When you hire a property manager, pay for advertising and cleaning, alongside various fees and rates for council and the like, they’re ongoing expenses.

Capital expenses contribute directly to your rental property depreciation. Capital works like the rendering of the building, any electrical work or appliances installed are eligible.

 

 

  • How can I measure depreciation potential?

 

You can go the old fashioned route and crunch the numbers yourself, but what’s the point if you don’t have to? Deppro has a free online depreciation estimate tool that’s trusted by investors, tax agents, and real estate professionals. You’ll need the following information:

  • Date of construction
  • Purchase price
  • Floor area
  • Location
  • Type of structure

 

 

  • Can I claim depreciation on previous renovations?

 

Yes you can! The beauty of rental property depreciation is you can claim existing works on any structure built after 1987, regardless of who completed them. You own the building after settlement, so the plant & equipment and capital works depreciation are yours.

 

 

  • What can I deduct at tax time?

 

This is one of the rental property depreciation questions we can’t answer. If you’re looking to claim deductions for your tax return, it’s better to ask your accountant. They’ll have your existing portfolio, previous tax history, and the other information they need to give you a better answer.

What you can depreciate is another matter. For example, if a tenant has caused damage to the property and you need to conduct capital works to fix them. You’ll have to make adjustments to the depreciation schedule, but you can claim depreciation on the works for as long as you own the property.

 

Customers rely on Deppro to answer their rental property depreciation questions before and after adding to their portfolios. Our blog has extensive advice on a range of topics and we’re available anytime over phone, or at our offices in capital cities around Australia.