New financial year: do you have all your ducks in a row?

It is an unfortunate fact that a large number of tax payers who own investment properties will collectively miss out on millions of dollars in tax depreciation benefits over the coming weeks, simply because they will not fully claim them due to a lack of knowledge.

For individual investors, these tax depreciation benefits can add up to thousands of dollars for just one financial year.

Tax depreciation on a residential property is a deduction against assessable income, allowing the owner to reduce the amount of tax payable.

Investors are able to claim for two distinct types of depreciation on buildings. The first is capital allowance, which is a deduction based on the historical construction costs of the property and may include surveying, engineering, architectural and building fees. The second is plant and equipment, which includes items such as floor coverings, window treatments and fixed equipment such as cookers.

Most investors do not realise that tax benefits obtained through depreciation can be equivalent to 60 per cent of the total purchase price of the property.

For a new apartment in a capital city, for example, this could equate to over $300,000 in tax benefits through depreciation.

You should engage the services of a tax deprecation company, who will undertake an inspection of your property and provide you with an ATO-compliant tax depreciation report that you can give to your accountant. This report is a one-off, and will outline the amount of tax benefits you can claim on an annual basis. Anyone considering employing a tax depreciation company should ensure that it is a member of the Australian Institute of Quantity Surveyors (AIQS).

Typically, a tax depreciation schedule costs around $600. This cost is tax-deductible, and is a small investment considering the large amount of tax depreciation benefits you can obtain, especially if you own a new or nearly new property.

DEPPRO estimates that only one in five residential investors makes use of the tax depreciation entitlements available.

Many investors who have owned their properties for several years and have not undertaken a tax depreciation schedule still have the potential to claim back thousands of dollars in depreciation benefits.

A depreciation schedule can be undertaken at any time by an investor. If you have owned a property for a number of years, you can still undertake a depreciation schedule and put in an adjusted tax return to obtain unclaimed tax depreciation benefits.

So if you are planning to visit your tax accountant in the next few weeks, raise the issue of tax depreciation and obtaining an ATO-compliant tax depreciation schedule for your property.

You should also discuss with your accountant the fact that desktop estimates of potential tax depreciation benefits are not accepted by the ATO – a physical inspection of the property is required.

Obtaining a tax depreciation schedule is a small investment that can deliver a huge financial return and boost cash flow during a time when rents throughout Australia are under downward pressure.