Taking advantage of depreciation on property

MILLIONS of dollars in unclaimed tax deductions are lost each year by property investors who fail to take full advantage of investment property depreciation entitlements.

Less than 20 per cent of investors are lodging claims which include all property-related deductions that can be claimed under income tax laws.

Property Research Institute direc-tor Tracy Magiatis said many investors did not realise that depreciation could be claimed on more than just a property’s bricks and mortar.

Depreciation could be claimed on 1500 fittings and fixtures within the property, including blinds, carpets, garden hoses and watering systems, stoves and telephones.

However, Ms Magiatis said the complexities of depreciation claims and income tax laws were often too much for the average property investors to follow.

A quantity surveyor should be employed to prepare a depreciation report, she said.

James Hannah, director of quantity surveying firm Herron Todd White, said the area of depreciation on plant items was confusing not only for property investors, but also some developers and real estate agents.

“Although people refer to it as depreciation there are actually two distinct types of allowances, which are capital works allowance (build-ing allowance) and the depreciation allowance on plant and articles,” Mr Hannah said.

The capital works allowance is based on the construction cost of the building calculated from the date of construction.

Investors could claim either 2.5 per cent or four per cent of the construction cost each year for the lifetime of the building, depending on the property.

To claim a four per cent allowance, the property must be a hotel, motel or guesthouse with more than 10 bedrooms, or an apartment building with more than 10 apartments. Properties such as this have a 25-year life, while all others have a 40-year life.

“After this time there is no more building allowance, as it has been exhausted,” Mr Hannah said.

He said that, essentially, depre-ciation could be claimed on any plant that is used to produce assess-able income from an income-pro-ducing property.

These items attracted a much higher depreciation rate than the capital works allowance.

All items under $1000 are pooled and depreciated over a three-year period.

And even if a property has no capital works allowance, deprecia-tion on plant and articles still could produce significant tax deductions.

Mr Hannah gave the example of a $226,000 property that had no capi-tal works allowance (built before 1985) where, in the first five years, the property generated a tax deduc-tion of $19,374 in plant and article allowances.

“For many old properties it is common for depreciable plant to be in the region of 15 to 20 per cent of the overall purchase price,” Mr Hannah said.

Ms Magiatis recommended property investors spend money on a quantity surveyor’s report, as the benefits were huge.

“The report sets out, year by year, the capital works and plant and article allowances for the lifetime of the property,” she said.

“It is a one-off cost, which is not so significant when you compare it to the benefits you receive from it.

“If you underclaim on your tax return, the tax department is not going to check your claims for you.”

Mr Hannah said such reports cost between $400 and $600 and should contain a detailed tax depreciation schedule that covers the life of the property, not just the first three years.

It also should include a compre-hensive list of plant and articles within the property.

Judge Constable intermediate accountant Alan Thirwell said while investors could estimate depre-ciation on their properties, only quantity surveyors were qualified to carry out such reports.

“If an investor knows the exact cost of the construction of the property then they can calculate their capital works allowance based on the property’s lifetime,” Mr Thirwell said.

“If they don’t have those figures they can do their own estimates but the burden is then on them to prove how they came to those figures if they are audited.

“A quantity surveyor’s report should stand up to an audit.”

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