With tax time just around the corner, many property investors are preparing to visit their accountant to complete their annual income tax assessment. Getting your tax in order can be an overwhelming task, but when you have a commercial investment property it can seem even more complex. There are many factors for commercial property investors to consider when lodging a tax return, including property depreciation.
To help you get the most out of your commercial property, here are eight top property depreciation tips for this end of financial year.
1. Both new and old commercial properties can be depreciated
Depreciation deductions can be claimed for the wear and tear of the building structure via a capital works deduction and for the plant and equipment assets within the property.
The Australian Taxation Office (ATO) allows owners of any commercial property in which construction commenced after 20 July 1982 to claim capital works deductions. If your property was built before this date, there may still be deductions available so consult with an expert.
For traveller accommodation, this date is 21 of August 1979. Depending on the year of construction, capital works deductions can be claimed at either 2.5% or 4%.
Depreciation deductions for plant and equipment assets are generally calculated based on the individual effective life for each item as set by the ATO.
2. Commercial tenants can claim depreciation too
It’s not just owners who can claim depreciation. Commercial tenants can claim depreciation for any fit-out they add to a property once their lease commences, including blinds, carpets, shelving, smoke alarms and security systems.
If lease conditions mandate a tenant return the property to its original condition, they may also be able to claim a write-off for any remaining depreciable value on the removed assets. In this instance, scrapping can be applied. Assets left behind by a previous tenant may also be available to be claimed by the property owner.
3. Know the difference between repairs and improvements
It’s important to understand the difference between a deductible repair and an improvement.
A repair is when an item or property is returned to its original state to retain its value. Repairs attract an immediate 100% deduction in the year of expense.
Improvements, on the other hand, occur when an investor enhances the condition of an item or property beyond that of when it was purchased. As improvements are capital in nature, they must be depreciated over time.
4. Don’t wait if you’ve only just purchased a property
If you haven’t owned your investment property for a full year you can still claim depreciation deductions this financial year.
Investors can claim partial-year depreciation deductions for the period their property is rented out or is genuinely available for rent. That is, when the property is given broad exposure to potential tenants and considering all the circumstances tenants are reasonably likely to rent the property.
Quantity surveyors use legislative tools such as the immediate write-off rule and low-value pooling method to make partial-year claims more beneficial to investors.
5. Make use of techniques that maximise deductions early
An immediate write-off applies to any item within an investment property with a value of less than $300. Investors are entitled to write-off the full amount of these assets in the year of purchase.
Low-value pooling, on the other hand, is a method of depreciating plant and equipment assets which have a value of less than $1,000. Such items can be added to a low-value pool and written off at an accelerated rate to maximise deductions. Item can be depreciated at 18.75% in the first year and 37.5% each year thereafter.
Immediate write-off and pooling rules may also apply if an asset is below a certain value, particularly for small and medium-sized business owners. As plant and equipment items are rarely the same age as the property and are often replaced and updated, there can be significant deductions available.
Specialist quantity surveyors can maximise your tax return by applying the immediate write-off rule and adding eligible assets to a low-value pool.
6. Amend previous tax returns
If you haven’t been claiming property depreciation deductions, the ATO allows investors to amend two previous tax returns. A tax depreciation schedule can provide the details of any deductions missed for an accountant to make a claim.
7. Get an expert to assess the property and provide a tax depreciation schedule
To ensure the correct deductions are claimed, investors should speak with a specialist quantity surveyor. Tax Ruling 97/25 states quantity surveyors are one of the few professions qualified to estimate construction costs for depreciation.
A quantity surveyor will inspect the property to make sure every plant and equipment asset is identified and that claims for fit-outs are correctly noted.
Having a tax depreciation schedule for your investment property has many lasting benefits and can help you build your wealth. A schedule will outline the available deductions for your property and help your accountant when lodging your tax return.
Bradley Beer is the Chief Executive Officer of BMT Tax Depreciation. The website provides additional details. This article is general information and does not consider the circumstances of any investor.