Top 10 ways to increase your tax return

When it comes to property investment, there are several ways to make money. However, with earnings also comes taxes, and you don’t want to pay more than you have to. Examples of tax-deductible property expenses include interest on your property loan, property management fees, council rates and insurance; as well as body corporate fees in an apartment.

In addition to actual cash expenses, investors who purchase both new and old properties can claim property depreciation. Property depreciation is considered a non-cash deduction, meaning an investor does not need to spend any money to be eligible to claim it. Investors can claim property depreciation for the wear and tear that occurs over time to the building structure and plant and equipment assets (description below) contained. Research suggests as many as eight in ten investors don’t claim depreciation at all or don’t claim the maximum depreciation deductions available for their investment properties. We caught up with BMT CEO, Bradley Beer, to find out about tax-deductible property expenses.

Q: What should buyers look for in a property if they are hoping to maximise the deductions in their tax bill?

A: It’s important that investors seek expert advice and crunch the numbers accurately to work out their after-tax cash flow when considering buying any property. All types of investment properties result in deductions for their owners. However, the type of property purchased, the size of the building and the construction commencement date can all have an impact on the depreciation deductions an investor can claim.

There are two categories of depreciation an investor can claim in any income-producing property:

  • Division 43 capital works allowance for the wear and tear which occurs to structural items contained in the property such as the walls, tiles, kitchen cupboards and the roof.
  • Division 40 plant and equipment depreciation for the wear and tear of the easily removable fixtures and fitting found in the property such as carpets, blinds, air conditioners and hot water systems.

Generally speaking, the newer the property, the higher the deductions, but there are still plenty of valuable deductions in older properties. A unit is also more likely to have higher depreciation deductions than a house due to the amount of material involved in the building structure and the likelihood that there will be additional plant and equipment found, especially when there are common property areas and assets.

Changes to depreciation legislation announced during the 9th of May 2017 federal budget were passed through the Senate on the 15th of November 2017. The new rules relate only to plant and equipment found in second-hand residential properties and deny investors who exchange contracts after 7.30pm on the 9th of May 2017 from claiming depreciation for previously used plant and equipment. The capital works component of a depreciation claim is not affected, and owners of all types of property can continue to claim capital works deductions as normal. Capital works deductions can be claimed in any residential property where construction commenced after the 15 September 1987 and non-residential/commercial properties where construction commenced after the 20 July 1982. These deductions typically make up 85 – 90% of an investor’s depreciation claims. It is therefore important that owners of second-hand residential investment properties continue to consult with a Quantity Surveyor to discover what they can claim.

A handy tool which can help buyers when considering their options is PropCalc. Investors can use this tool to determine the cash flow needed to own their next home or investment property. PropCalc uses data such as income, stamp duty, the deposit amount, expenses, rental income and tax depreciation figures (for investment properties) to provide an accurate after-tax figure. Buyers can change the cash flow results PropCalc provides to show a weekly, fortnightly, monthly or even yearly outcome to determine the cash flow for their individual situation. To use PropCalc, investors can register for BMT Tax Depreciation’s online portal MyBMT.

Q: With buying land and building a new home which outgoing costs are tax deductible?

A: If you are purchasing a property with the intention of it becoming your home or your primary place of residence, you are ineligible to claim tax deductions.

The Autralian Taxation Office (ATO) stipulate that a property must be income producing for the owner be eligible to claim expenses related to holding the property or to claim property depreciation deductions. However, if you plan to purchase a property and use it initially as your primary place of residence and later intend to rent it out, you will become eligible to claim depreciation and any other expenses once the property becomes income producing.

Specific rules apply when claiming depreciation for plant and equipment assets within properties which have been lived in as a primary place of residence.

A property owner will not be eligible to claim depreciation on pre-existing plant and equipment assets within properties which have been lived in as a primary place of residence where the owner decides to rent the property out after the 1st of July 2017. Plant and equipment assets within this scenario are considered previously used.
For a primary place of residence, it is also important to be aware of the Capital Gains Tax (CGT) exemptions that apply. Owners are exempt from paying CGT for properties on land less than two hectares.

A six-year rule also applies where an owner of a primary place of residence can receive the full CGT exemption if they move out of the property and rent it out for less than six years and then move back into the property. A property owner can apply this rule as many times as they wish so long as they return to the property to live and ensure that each absence is less than six years and they don’t have another primary place of residence.

A six-month rule also states that if an owner has a property that is their primary place of residence and circumstances require the owner to move out, they cannot claim any other property as their primary place of residence for CGT exemptions during their leave of absence.

Exceptions to this rule apply if both properties are treated as the property owner’s primary place of residence within a six month period and one of the below conditions is met:

  • The old property was the owner’s primary place of residence (PPOR) for a continuous period of at least three months in the twelve months before they sold it
  • An owner did not use the property to provide assessable income in any part of the twelve months prior to selling
  • The new property becomes the property owner’s PPOR

Q: Is there anything buyers need to know about setting up their home loans to ensure the property is tax deductible?

A: It is always wise to seek personal financial advice from a Mortgage Broker, a Financial Adviser and your Accountant to ensure loans for investment properties are structured in the best way to ensure interest is deductible now and into the future. A Mortgage Broker or Banking Loan Officer can provide advice on loan features such as offset accounts and how to avoid mixing personal debt with investment debt when setting up your loan.

Q: How does depreciation work on new properties?

A: Property depreciation applies to both new and older properties. However, additional rules were passed on the 15 November 2017 regarding claiming the plant and equipment component in second-hand residential properties. Substantially renovated properties and new properties are not affected, and investors who purchase these types of properties can continue to claim both the capital works deductions and plant and equipment depreciation as normal.

The owner of a brand-new residential investment property can claim capital works deductions at a rate of 2.5% per year for a maximum of forty years, whilst owners of older properties can claim any remaining years of the property’s forty year life. For example, if a property is ten year’s old at the time of purchase, an investor will be able to claim capital works deductions for the remaining thirty years. If any structural work has been completed by a previous owner, the investor is also eligible to claim capital works deductions on the new additions. Eligible plant and equipment assets will depreciate based on an individual effective life as outlined by the Tax Commissioner in the latest tax ruling.

Q: Is there anything that can’t be claimed as depreciation or tax deductible?

A: Aside from the topics we covered above, some of the more common things you can’t claim depreciation for in an investment property include:

  • The property’s land — you cannot claim depreciation for the land your property is situated on or its value.
  • Demolition — while you can scrap assets and structures and claim any remaining depreciable value, you cannot claim depreciation on the cost of demolition work at your property.
  • Soft landscaping — while you can claim depreciation for items such as a retaining wall, which would have undergone construction, you cannot claim depreciation for soft landscaping such as grass, shrubs or trees.
  • Repairs and maintenance — while repairs and maintenance are deductible expenses, they are claimed separately to depreciation and have specific definitions. Repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. Maintenance is considered work completed to prevent deterioration, for example oiling a deck. While you cannot claim depreciation for repairs or maintenance, any costs incurred to repair or maintain a rental property can be claimed as an immediate 100% deduction in the year of the expense. Repairs and maintenance shouldn’t be confused with capital improvements, which occur when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction and depreciated over time or as plant and equipment depreciation. An example of a structural improvement which must be claimed as a capital works deduction is replacing the kitchen cupboards. When any plant and equipment assets are removed and replaced, for example an air conditioner, this will also be considered a capital improvement.
  • Any costs associated with acquiring the property — for example legal fees, conveyancing fees, building and pest inspection fees and stamp duty. Property depreciation cannot be claimed for any of these costs.

Q: What is the most common mistake people make when setting up a property to reduce their tax bill?

A: One of the most common mistakes made by investors is failing to claim or maximise their depreciation deductions. It’s therefore important for investors to seek expert advice from a Quantity Surveyor and to obtain a comprehensive tax depreciation schedule which outlines all the deductions available from their property.

Investors often assume that an Accountant will take care of all of their depreciation claims. However, the ATO recognise Quantity Surveyors under Tax Ruling 97/25 as one of the few professionals with the expert construction cost estimating skills necessary to perform this function.

To avoid missing out on deductions, investors should contact a specialist Quantity Surveyor, such as BMT Tax Depreciation, for any income-producing property they purchase.

Click below to download the BMT guide on the Top 10 ways to increase your tax return.

Written: 5 November 2018

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