Are your clients missing out on valuable deductions when renovating their investment property?
Renovating can increase rental yields and improve cash flow but there are important rules and regulations both investors and accountants should be aware of.
Here are some key points to remember when your client is completing renovations.
Living in the property while renovating
Investors who live in their rental property while renovating risk missing out on thousands of dollars in property depreciation deductions.
According to legislation introduced in 2017, investors are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. As a result, the investor is at risk of losing their tax benefits.
Landlords who are planning on installing new plant and equipment assets should make these additions after they move out of the property and it has been listed for rent. This will ensure they’re eligible to claim the maximum depreciation deductions available. Regardless of how existing assets are treated, owners can claim depreciation on all
brand-new assets they add to the property.
It’s important to note the 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties.
Scrapping deductions for removed assets
Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are unaffected by the legislation changes and can still be claimed by owners of income-producing properties. These deductions typically make up 85-90 per cent of a total depreciation claim.
When removing structural assets there may be remaining depreciation deductions available. A process known as scrapping can often be applied, allowing investors to claim these deductions in the year the items are removed.
In order to claim scrapping deductions investors will need to have the original assets valued. The pre-renovation depreciation schedule will detail asset values and can act as evidence in the event of an Australian Taxation Office (ATO) audit.
Once your client has had their pre-renovated property valued, we highly recommend updating the schedule after major works are completed. The new schedule will outline all deductions the owner can claim for the remaining life of the property, including any those for any additional works from the date of their completion.
It’s also important to note that investors who purchase second-hand residential properties after 7:30pm on the 9th of May 2017 will not be able to claim scrapping deductions for existing plant and equipment assets.
Renovations completed by a previous owner
If a property is considered to have been substantially renovated by the previous owner for selling purposes, the investor can claim depreciation on the new plant and equipment assets along with any new or old qualifying capital works deductions available.
It’s common for property investors to miss these depreciation deductions as they’re often uncertain of which items have been updated or replaced. This is particularly the case when the work isn’t visible, such as new plumbing, waterproofing and electrical rewiring. For this reason, it’s important to encourage your clients to organise a tax depreciation schedule.
As a part of the BMT Tax Depreciation process, a specialist Quantity Surveyor will inspect your clients’ property to ensure every deduction is uncovered. Using their expertise, the inspector will assess the capital works and plant and equipment assets found within the property. The inspection ensures all depreciable items are documented appropriately with detailed notes, measurements and photographs.
Equipped with these details, you’ll be able to maximise and substantiate your clients’ depreciation claims.
Repairs, maintenance and improvements
Knowing the difference between repairs, maintenance and capital improvement deductions is particularly important when your client is renovating.
According to the ATO, repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. This occurs when an asset is already damaged or deteriorated and therefore requires repairing.
Maintenance, on the other hand, is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion.
Any costs incurred to repair or maintain your client’s investment property can be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are used to work out an investor’s capital gain or capital loss when the property is sold.
A capital improvement occurs 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 or as plant and equipment depreciation. Capital works refers to the deductions available for the building’s structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings.
A depreciation schedule from a specialist Quantity Surveyor will help property investors to avoid common renovation mistakes and assist you when preparing annual tax assessments. A BMT Tax Depreciation Schedule will outline all deductions available for the building’s structure as well as any depreciable plant and equipment assets found within the property.
To ensure your clients aren’t at risk of missing out on valuable deductions, encourage them to consult with a specialist Quantity Surveyor before starting renovations.
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.
In the interests of protecting SMSF members and their retirement savings from fraud and misconduct, the ATO has announced it will send out an email and/or a text message via an SMS when changes (including updates to the SMSF financial details or member information) are made.
Accordingly, the ATO has urged all SMSF members to ensure they update their contact details either:
- online at abr.gov.au (with an AUSkey or an ABN linked to their myGov account);
- through their registered tax agent;
- by phoning 13 10 20 (for authorised contacts of the relevant SMSF); or
- by lodging the paper form (NAT 3036).
The ATO has urged SMSF members who are concerned about notified changes to first speak with the other trustees of the SMSF or the authorised agent of their SMSF, before contacting the ATO.
The Government recently tabled legislation, making its second attempt to deny access to the CGT main residence exemption for individuals who are foreign residents (i.e., non-resident taxpayers for Australian tax purposes).
The restrictions to this CGT exemption will apply to taxpayers who are a non-resident at the time of the relevant CGT event (i.e., generally as at the contract date).
If enacted, the proposed changes will potentially impact foreign residents in the two ways outlined below.
1. Transitional rules for properties held before 7:30pm (AEST) on 9 May 2017
Firstly, for properties held prior to the 2017 Federal Budget (i.e., before 7:30pm AEST on 9 May 2017), the CGT main residence exemption will only be able to be claimed, for a non-resident, for disposals that occur up until 30 June 2020.
For disposals of properties occurring on or after 1 July 2020, foreign residents will have no access to the CGT main residence exemption, unless specified ‘life events’ occur within a continuous period of six years of the taxpayer becoming a foreign resident. These 'life events' include:
- The terminal illness of the taxpayer, their spouse or a child under the age of 18 years.
- The death of a spouse or child under the age of 18.
- A transfer of the relevant asset as a result of a divorce, separation or similar maintenance agreement.
2. Properties acquired at or after 7:30pm (AEST) 9 May 2017
Secondly, for properties acquired at or after the 2017 Budget night, the CGT main residence exemption will no longer be available for non-resident taxpayers, unless the same specified ‘life events’ (as outlined above) occur within a continuous period of six years of the taxpayer becoming a foreign resident.
STP and superannuation guarantee
In a presentation at the Australian Institute of Superannuation Trustees Chairs Forum, the ATO's Deputy Commissioner confirmed that as a result of STP, the ATO now has an "unprecedented level of visibility" of super information.
In particular, the ATO's examination of Super Guarantee ('SG') contributions of some 75 million payment transactions for the first three quarters of 2019 (for approximately 400,000 employers) has shown that 90 - 92% of contribution transactions by volume and 85 - 90% of transactions by dollar value were paid on time.
The ATO is now starting to actively use this data to warn employers who appear not to be paying the required SG on time (or at all).
As a result, it has notified 2,500 employers that they have paid their SG contributions late during 2019. Due-date reminders were also sent to a further 4,000 employers.
PAYG and deductions for payments to workers
The ATO has reminded business taxpayers they can no longer claim deductions for certain payments to workers if they have not met their PAYG withholding obligations from 1 July 2019.
If the PAYG withholding rules require an amount to be withheld, to claim a deduction for most payments to a worker, a business taxpayer must:
- withhold the amount from the payment before they pay their worker; and
- report that amount to the ATO.
Importantly, where a taxpayer simply makes a mistake and withholds or reports an incorrect amount,they will not lose their deduction, although any such errors should be corrected as soon as possible so as to minimise penalties.
Additionally, a deduction is still available if they voluntarily disclose to the ATO prior to the commencement of an audit or other ATO compliance activity involving their PAYG withholding obligations or deduction claims.
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