Claiming depreciation can make a significant difference to a property investor’s cash flow. Despite this, of all the tax deductions available for an investor to claim back from their property, depreciation is the most often missed.
Recent statistics from the Australian Taxation Office (ATO) suggest that only 30 per cent of property investors claim depreciation for available capital works deductions, and just 18.75 per cent claim the depreciation of plant and equipment assets. That is quite a significant number of investors who are missing out on thousands of dollars they are eligible to claim.
So why do investors fail to claim the depreciation deductions they are entitled to? According to BMT Tax Depreciation Managing Director, Bradley Beer, there are a number of reasons.
“One of main reasons investors fail to claim depreciation is because they don’t need to spend any money to be able to claim it. As a non cash deduction, investors are often unaware that there are already deductions available to claim for the existing building structure and fixtures and fittings contained within the property,” says Bradley.
“Another mistake property investors often make is to assume they’re ineligible because they own an older property, or they may have only recently purchased their property and think because of the short term of ownership it is not worthwhile making a claim. The reality is, it is worth making an enquiry for any property,” said Bradley.
For those property investors who are unaware of what depreciation is and wondering how to go about making a claim, we’ll explain further.
The ATO allows any owner who obtains an income from their property to claim a depreciation deduction for the wear and tear of a building structure and its fixtures over time.
To make a depreciation claim, investment property owners should contact a reputable Quantity Surveyor that specialises in tax depreciation. The ATO recognise Quantity Surveyors under Tax Ruling 97/25 as one of the few professionals with the appropriate construction costing skills to estimate building costs for depreciation purposes.
The quantity surveying company should organise for one of their specialist staff members to perform a site inspection of the property to take measurements, adequate notes and photographic evidence of all fittings and fixtures contained within the property. This information will then be collated to put together a tax depreciation schedule which outlines all of the available claims for the life of the property (40 years) for the property owners Accountant to process during the completion of their annual tax assessment.
“On average most investors can expect to receive between $5,000 and $10,000 in first year depreciation deductions for a residential property. These additional funds can make a significant difference to the property owner’s cash flow,” says Bradley.
The following scenario shows how one property investor’s cash flow was improved by claiming depreciation.
Margaret purchased a two bedroom apartment for $528,000 one year ago. The property was rented for $470 per week with a total income of $24,440 per annum. Expenses for the property including interest, rates and management fees totalled to $37,935.
After calling BMT Tax Depreciation, Margaret found that she would be able to claim $9,938 in depreciation deductions.
The following scenario shows Margaret’s cash-flow with and without depreciation a depreciation claim.
2 Bedroom unit purchased for $528,000
|Scenario without depreciation claim||Scenario with depreciation claim of $9,938|
|Annual expenses||$37,935||Annual expenses||$37,935|
|Annual income ($470 x 52 weeks)||$24,440||Annual income ($470 x 52 weeks)||$27,560|
|Taxation loss||-$13,495||Taxation loss||-$13,495|
|Total taxation loss||-$13,495||Total Deduction (taxation loss + depreciation)||-$23,433|
|Tax refund (Tax loss x tax rate of 37%)||-$4,993||Tax refund (tax rate of 37%)||$8,670|
|Net cash outlay (initial loss + refund)||-$8,502||Net cash flow (initial loss + refund)||-$4,825|
|Cash outlay per week||-$164||Cash outlay per week||-$93|
Difference of $71 per week
The depreciation estimates in this case study were calculated using the diminishing value method of depreciation.
Before claiming depreciation, Margaret would experience a loss of $164 per week for the first year of ownership for her property. Simply by claiming depreciation, Margaret was able to turn her cash flow position into a more positive one and reduce her loss to just $93 per week. In total BMT Tax Depreciation were able to save this investor $3,692 in just one year.
BMT can provide an estimate for any investment property owner of what deductions they might be able to claim. To find out more, simply contact BMT Tax Depreciation on 1300 728 726 today and speak to one of their friendly staff.
Article Provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation. Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.