Depreciation can be a rather complex area with specific rules, qualifying dates, depreciation rates, methods for claiming and pre-determined effective lives of assets. As such, claiming depreciation deductions can be a confusing task for many property investors.
For this reason, it’s imperative that investors get a depreciation specialist to prepare their tax depreciation schedule. This will ensure investors get maximum depreciation deductions and that all claims are legally compliant. The last thing you want is a fine from the ATO for incorrect claims on your tax return.
To help property investors ensure their deductions are claimed correctly, here are four common mistakes to avoid when claiming depreciation for an investment property
1. Not making a partial year claim
Rental property owners should only claim deductions for the periods their property is rented out or is genuinely available for rent. Holiday home owners in particular should be aware of this to ensure deductions are claimed correctly. Similarly, if an investor has only owned their property for a few months of that financial year, they can still make a partial year claim for these weeks or months it was income producing.
To ensure deductions are correctly claimed for the portion of the year a property is income producing or available for rent, investors should request a tax depreciation schedule. A BMT Tax Depreciation Schedule will outline all qualifying deductions from the date of settlement and include a partial year claim based on the time the property is rented.
2. Claiming capital works and plant and equipment deductions incorrectly
Investors who lodge self-assessed deductions often make the mistake of incorrectly allocating plant and equipment assets as capital works deductions and vice versa.
This can result in two issues for the investor. Firstly they could over claim, resulting in unwanted attention from the ATO, or secondly they could under claim and miss out on receiving the maximum deductions available.
These mistakes generally occur because investors do not have the knowledge of depreciation legislation necessary to separate items appropriately. Furthermore, it’s because they have not sought adequate advice or requested a tax depreciation schedule.
To ensure all deductions are correct and maximised, a specialist Quantity Surveyor will complete a site inspection as part of the process of arranging a depreciation schedule. This inspection allows a depreciation expert to take photographs and note every asset within the property. They will also perform the necessary searches to find any details required to estimate construction costs, including those for any renovations which have taken place, even if completed by a previous owner. A depreciation schedule will outline all deductions available for capital works and separately itemise all deductions for plant and equipment items.
3. Not splitting deductions correctly as co-owners
Many co-owners make the mistake of calculating depreciation first and then splitting the deductions based on ownership percentage. However, depreciation legislation allows co-owners to split an asset’s value by ownership percentage first, potentially qualifying them for higher rates of depreciation, meaning more money back in both owners’ pockets sooner. Co-owner investors should request a split depreciation schedule to ensure deductions are outlined based on each owner’s interest in the assets contained within the investment property.
4. Incorrectly claiming repairs, maintenance and capital improvements
Expenses for repairs and maintenance are claimed differently to capital improvements. The ATO provides clear definitions of each to help investment property owners to ensure these claims are made correctly.
Repairs (work completed to fix damage or deterioration to a property) and maintenance (work completed to prevent deterioration to a property) should be claimed as an immediate deduction in the year an expense occurred. However, any capital improvements (work which improves the condition or value beyond its original state at the time of purchase) must be claimed as a capital works deduction or as plant and equipment depreciation.
If you’re preparing your tax return, it’s important to seek advice from an expert. Quantity Surveyors are recognised by the ATO as one of a few professionals with the necessary knowledge to calculate construction costs for depreciation purposes. Alongside your Accountant, they can provide guidance to steer you on the right path to ensure your claim is correct and you receive the best possible deductions. This also means you’ll have the adequate evidence necessary should the ATO question any of your claims.
Deductions for repairs, maintenance and improvements are areas the Australian Taxation Office pay particular attention to on annual tax returns.
For this reason it is important that investors understand the difference.
Repairs are considered work completed to fix damage or deterioration of a property, for example replacing part of a damaged fence.
Maintenance is considered work completed to prevent deterioration to a property, for example oiling a deck.
Any costs incurred to repair or maintain a rental property can be claimed as an immediate 100 per cent deduction in the year of the expense.
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 and depreciated over time or as plant and equipment depreciation. An example of a capital works deductions could be replacing the kitchen cupboards. If any plant and equipment items are removed and replaced, for example an air conditioner, this will also be considered a capital improvement.
Investors considering completing any work to their property should contact a specialist Quantity Surveyor for advice before they start work.
To discover what can be claimed for any investment property, simply request a quote online or speak with the expert team at BMT on 1300 728 726.
The ATO claims that it is committed to supporting small businesses and making it as easy as possible for them to understand and meet their tax obligations at tax time.
Consequently, Assistant Commissioner Mathew Umina has some tips to help small business in the lead up to and during tax time, including:
– simplified trading stock rules (if the estimate of the difference between opening and closing trading stock is $5,000 or less, the small business doesn’t need to do a stocktake);
– concessions that allow new small businesses to claim an immediate deduction for start-up costs like professional, legal and accounting advice;
– simplified depreciation rules, including the $20,000 instant asset write-off for assets costing less than $20,000 bought and installed by 30 June 2018.
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