Claim $4,852 in 29 days: Bradley Beer

Investors who have only owned a property for a short period of time often ask the question: is it worthwhile making a depreciation claim straight away?

The answer is yes, even if a property has been purchased towards the end of a financial year, valuable deductions are available for the owner straight away.

Investors can make the mistake of postponing organising a depreciation schedule until the following year. However, a specialist quantity surveyor will find ways in which partial year depreciation deductions can be maximised, resulting in extra cashflow for the owner.

A quantity surveyor who specialises in tax depreciation will use their knowledge of Australian Taxation Office legislation to increase deductions. They also will utilise the most current methods of calculating depreciation to make partial-year claims more beneficial to property owners, regardless of the time a property is owned and rented.

Here are some of the legislated mechanisms which, if used correctly, will increase the cash return.

1. Immediate write-off: Any item costing less than $300 within a property can be immediately written off within the first year of ownership. This is regardless of how many days the property has been owned within that year.
2. Low-value pooling: This is a method of depreciating assets at a higher rate to maximise depreciation deductions. Property investors who place assets into the low-value pool are able to claim them at a rate of 18.75% in the year of purchase, regardless of how long the property has been owned and rented. From the second year onwards, the remaining balance of the item can be claimed at an accelerated rate of 37.5%.
3. Low-cost assets:Any depreciable asset that has an opening value of less than $1,000 in the year of acquisition is considered to be a low-cost asset. These assets can be included in the low-value pool, resulting in an increased depreciation rate.
4. Low-value assets: A low-value asset is a depreciable asset that has a written down value of less than $1,000. That is, the value of the asset is greater than $1,000 in the year of acquisition. However, the remaining value after a previous year’s depreciation claim has been reduced to under $1,000. These assets can be added to the low-value pool as they qualify.
5. Scrapping: Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. If a property investor decides to improve an investment property and removes any assets during the process, they can claim these items as an immediate tax deduction. It is important to ask a quantity surveyor to perform a site inspection both before and after renovations are completed so they can identify any remaining depreciable value of the items which are going to be removed during the process.

Example:

The following example explains how some of the methods described above have been used to maximise a property owner’s depreciation deductions when an investment property has only been owned for a very small portion of the financial year.

A house purchased for $550,000 by a property investor was rented from June 2.

The table below shows a summary of the depreciation deductions that were available to the owners after renting the property for only 29 days of the financial year for this property.

The plant and equipment deductions for the first twenty-nine days totalled $4,082. By using the immediate write-off for items that cost less than $300 (e.g. smoke alarm and exhaust fans), $1,288 was found in deductions. From low-value pooled items, the owner was able to claim back $2,274 (e.g. hot water system and ceiling fans). The remaining items were depreciated based on their effective lives and scaled down based on the portion of time owned during the first full financial year. These items accounted for the remaining $520 in depreciation deductions.

If a property owner has only owned and rented a property for a few weeks of the financial year, the owners should always seek the services of a specialist quantity surveyor to accelerate the depreciation claim available.

By utilising the legislation available from the ATO, depreciation claims can truly be maximised for the first partial year. A tax depreciation schedule will also outline all remaining deductions for the lifetime of the property (40 years). In most cases, future year claims will also be maximised by using these tools to calculate the depreciation deductions available.

To calculate the likely depreciation claims available on your investment property, please click here.

Bradley Beer is the Managing Director of BMT Tax Depreciation, a leading quantity surveying firm specialising in the preparation of tax depreciation schedules for property investors.

BMT also works with accountants, financial planners, developers and property managers to help to maximise the depreciation deductions available for property investors and commercial property owners.