Benefits of depreciation can add up for investors
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Tuesday, 9 July, 2002 - 22:00
THERE are considerable advantages available for property owners and investors through the depreciation of their property – provided they can get past some enduring myths.
Perhaps the most potent myth surrounding depreciation and residential property relates to buying investment property on the secondary market, rather than brand new product.
One industry source spoken to by WA Business News said there were some bargains in the apartment market for properties built in the past few years.
“One of the problems is that people just don’t realise that there is depreciation on second-hand property,” the spokesperson said.
“People think you’ve got to buy brand new property to get depreciation.
“I think that contributes to people’s reluctance to buy recently completed product, although it often represents a really good buy.”
There are different rates of depreciation depending on the type of property and its primary function.
For business owners there are two main types of depreciation – building depreciation and plant and equipment depreciation.
Building depreciation is that based on the cost of construction of a building.
The plant and equipment depreciation is based on the value of any equipment, including interior fittings and furniture, which is utilised in the course of running the business.
For large commercial buildings, building owners are able to claim depreciation on a number of services within the property, including fire equipment, elevators and exit lights.
Despite this, the way in which depreciation is measured has changed in the past 12 months following the introduction of the Uniform Capital Allowance (UCA) System on July 1 2001.
The introduction of the new system heralded the removal of what was called ‘accelerated depreciation’.
KPMG senior tax manager Daniel Boyd said the new system would have a significant effect on capital-intensive industries or capital expenditure projects.
The UCA System generally allows tax deductions for capital expenditure to be claimed over the effective life of the asset or project.
“The impact is that taxpayers have seen substantial reductions in the amount of depreciation they are able to claim for tax purposes,” Mr Boyd said.
“There are still significant tax planning opportunities and, as such, the importance of seeking advice to maximise any potential deductions should not be underestimated.”
For individuals purchasing residential property as an investment there are considerable depreciation entitlements available and many people are missing out on these, according to depreciation specialist DEPpro Perth manager Dan Daly.
“Investors fail to understand that the tax benefits from depreciation can be just as important as rental income,” Mr Daly said.
“There are many issues concerning the depreciation entitlements on properties. In many cases, strata style homes provide a greater number of depreciable items than houses.”
One major issues is that, while owners are aware that internal fixtures can be depreciated, items such as a share of common area, swimming pools and gymnasiums are not taken into consideration.
“A depreciation schedule can include more than 300 items,” Mr Daly said.
For short stay accommodation the rate of depreciation is 4 per cent, compared with 2.5 per cent for a normal rental property.
Mr Daly claims using a depreciation specialist allows clients to access a combination of experience in quantity surveying and tax.
“Accountants will traditionally look up the tax act (in relation to depreciation) where there’s over 1,500 items,” Mr Daly said.
“According to our research over 20 per cent of people who own investment property don’t claim their full entitlement.
“What we are trying also to do is access the owner/operator market because it’s generally the small business operators who don’t get the full advantage.”
K P Johns & Company managing director Keith Johns said investors and business owners should seek advice from their accountants.
In the business community most people were well aware of the depreciation credits they can achieve, he said.
“Investors, (the mums and dads market) really need to pay professional people to do it,” Mr Johns said.
Quantity surveyors were often utilised to complete an audit of assets, he said.
“Quantity surveyors come into it. They itemise the [depreciable] assets, so you might depreciate the light as a separate asset,” Mr Johns said.
“It’s a very useful service and I’ve used them.”
In the commercial or business sector depreciation is something that is pretty well understood, he said.
However, for smaller investors who have purchased residential property, the concept of depreciation may be more of a mystery.
“But you should be able to go to any quantity surveyor,” Mr Johns said.
“Like any professional service, some may be better than others.”
Colliers International director of commercial investment and sales Ian Mickle said the larger professional property operations were well aware of the advantages
of depreciation particularly in relation to products such as serviced apartments.
“Maybe some people aren’t fully utilising it [depreciation],” Mr Mickle said.
“ But there are significant tax credits in the early years for new apartments.”
In the apartment market, Mark Hay Realty Group principal Mark Hay said he felt many potential property investors were not aware of the windfall depreciation offered.
“Basically, depreciation is a gift given by the government to stimulate the housing sector,” Mr Hay said.
“If you are buying a brand new property, the purchaser should get a full depreciation schedule from the builder.
“If you’re buying a second-hand property you should also claim depreciation, the buyer should go back to the original developer and ask for the original depreciation schedule.
“If you’re a bit smart you’ll ask for the full depreciation schedule as part of the [purchase] contract.”
In the case of second-hand property, the benefit of depreciation would depend on the age of the building because the depreciation was based on the original construction costs, he said.
Mr Hay said buyers should employ a quantity surveyor to undertake a valuation of the property for depreciation purposes.
Individual investors were missing out the most, he said.
Perhaps the most potent myth surrounding depreciation and residential property relates to buying investment property on the secondary market, rather than brand new product.
One industry source spoken to by WA Business News said there were some bargains in the apartment market for properties built in the past few years.
“One of the problems is that people just don’t realise that there is depreciation on second-hand property,” the spokesperson said.
“People think you’ve got to buy brand new property to get depreciation.
“I think that contributes to people’s reluctance to buy recently completed product, although it often represents a really good buy.”
There are different rates of depreciation depending on the type of property and its primary function.
For business owners there are two main types of depreciation – building depreciation and plant and equipment depreciation.
Building depreciation is that based on the cost of construction of a building.
The plant and equipment depreciation is based on the value of any equipment, including interior fittings and furniture, which is utilised in the course of running the business.
For large commercial buildings, building owners are able to claim depreciation on a number of services within the property, including fire equipment, elevators and exit lights.
Despite this, the way in which depreciation is measured has changed in the past 12 months following the introduction of the Uniform Capital Allowance (UCA) System on July 1 2001.
The introduction of the new system heralded the removal of what was called ‘accelerated depreciation’.
KPMG senior tax manager Daniel Boyd said the new system would have a significant effect on capital-intensive industries or capital expenditure projects.
The UCA System generally allows tax deductions for capital expenditure to be claimed over the effective life of the asset or project.
“The impact is that taxpayers have seen substantial reductions in the amount of depreciation they are able to claim for tax purposes,” Mr Boyd said.
“There are still significant tax planning opportunities and, as such, the importance of seeking advice to maximise any potential deductions should not be underestimated.”
For individuals purchasing residential property as an investment there are considerable depreciation entitlements available and many people are missing out on these, according to depreciation specialist DEPpro Perth manager Dan Daly.
“Investors fail to understand that the tax benefits from depreciation can be just as important as rental income,” Mr Daly said.
“There are many issues concerning the depreciation entitlements on properties. In many cases, strata style homes provide a greater number of depreciable items than houses.”
One major issues is that, while owners are aware that internal fixtures can be depreciated, items such as a share of common area, swimming pools and gymnasiums are not taken into consideration.
“A depreciation schedule can include more than 300 items,” Mr Daly said.
For short stay accommodation the rate of depreciation is 4 per cent, compared with 2.5 per cent for a normal rental property.
Mr Daly claims using a depreciation specialist allows clients to access a combination of experience in quantity surveying and tax.
“Accountants will traditionally look up the tax act (in relation to depreciation) where there’s over 1,500 items,” Mr Daly said.
“According to our research over 20 per cent of people who own investment property don’t claim their full entitlement.
“What we are trying also to do is access the owner/operator market because it’s generally the small business operators who don’t get the full advantage.”
K P Johns & Company managing director Keith Johns said investors and business owners should seek advice from their accountants.
In the business community most people were well aware of the depreciation credits they can achieve, he said.
“Investors, (the mums and dads market) really need to pay professional people to do it,” Mr Johns said.
Quantity surveyors were often utilised to complete an audit of assets, he said.
“Quantity surveyors come into it. They itemise the [depreciable] assets, so you might depreciate the light as a separate asset,” Mr Johns said.
“It’s a very useful service and I’ve used them.”
In the commercial or business sector depreciation is something that is pretty well understood, he said.
However, for smaller investors who have purchased residential property, the concept of depreciation may be more of a mystery.
“But you should be able to go to any quantity surveyor,” Mr Johns said.
“Like any professional service, some may be better than others.”
Colliers International director of commercial investment and sales Ian Mickle said the larger professional property operations were well aware of the advantages
of depreciation particularly in relation to products such as serviced apartments.
“Maybe some people aren’t fully utilising it [depreciation],” Mr Mickle said.
“ But there are significant tax credits in the early years for new apartments.”
In the apartment market, Mark Hay Realty Group principal Mark Hay said he felt many potential property investors were not aware of the windfall depreciation offered.
“Basically, depreciation is a gift given by the government to stimulate the housing sector,” Mr Hay said.
“If you are buying a brand new property, the purchaser should get a full depreciation schedule from the builder.
“If you’re buying a second-hand property you should also claim depreciation, the buyer should go back to the original developer and ask for the original depreciation schedule.
“If you’re a bit smart you’ll ask for the full depreciation schedule as part of the [purchase] contract.”
In the case of second-hand property, the benefit of depreciation would depend on the age of the building because the depreciation was based on the original construction costs, he said.
Mr Hay said buyers should employ a quantity surveyor to undertake a valuation of the property for depreciation purposes.
Individual investors were missing out the most, he said.