The ABC of tax depreciation

A good way of understanding how you can benefit from tax depreciation from owning an investment property is comparable to buying new car.

If you bought a new car, you will understand that every year it depreciates in value. The same principle applies to property. If a property is being used for investment purposes, the Australian Tax Offices allows the investor to claim the decline in value of the building by way of a tax deduction.

The amount that can be deducted depends on the age and value of the building but it is varies between 2.5% to 4% of the capital works value of the building each year.
 
An investor can claim these tax benefits by using the services of the tax depreciation specialist who prepares a tax depreciation schedule or report.

This depreciation report itemises the age of the property, what materials it is built from, the internal fittings such as carpets, window treatments, appliances etc. An estimated value is placed against these various items and they are depreciated depending on their age and value.
 
You only need to do one depreciation report for a property and it can be updated each year by the accountant if the investor for example, installs a new kitchen.
 
Beware of unqualified depreciation companies

Unfortunately, there are tax depreciation companies that do not have the expertise to properly prepare a tax depreciation report meaning that it may be rejected by the ATO.

To protect their interests and ensure that they select a company that is fully compliant with ATO rulings, members of the public should select a company that is a member of The Australian Institute of Quantity Surveyors (AIQS).
 
AIQS is the professional standards body for quantity surveyors throughout Australia and enjoys a close working relationship with the ATO.
 
Over recent years AIQS has worked with the ATO on the review and revision of the requirements for investment/rental property depreciation reporting.  
 
DEPPRO is an Associate Member of AIQS and uses systems that are fully compliant with ATO rulings.

 Property investors should be wary of companies who are not members of AIQS and employ salesmen or women touting catch phrases and a more dubious approach to providing advice in relation to tax depreciation entitlements.
 
Complete the tax depreciation schedule at the time of settlement:

Many investors make the mistake that they have to wait until the end of the financial year before they can undertake a tax depreciation report.

It is important to complete the tax depreciation report at the time of settlement of the property.

This report is a physical snapshot of the property at the time of purchase and is the key reference point if the investor wishes to make any renovations or additions to the property.

For example, if the investor undertakes expensive renovations before undertaking a tax depreciation report, these renovations expenses may not be claimable for tax depreciation purposes.

Most properties regardless of their age can offer investors substantial tax benefits through obtaining such a schedule.
 
That is why it is important that you undertake a tax depreciation schedule as soon as possible after the settlement date of your purchase because if you undertake renovations, an tax depreciation schedule will ensure that you can claim all tax benefits through physical improvements to the building.

Completing the tax depreciation schedule at the time of settlement also means that the property investor can claims potential tax benefits straight away.

To highlight these immediate tax benefits, below are examples of two recent properties which DEPPRO completed tax depreciation reports on:

Example 1:
House constructed in 2005 & purchased for $350,000
Settlement – March 2013
Tax Deductions from March 2013 – June 2013 = $3,408
 
Example 2:
Unit constructed in 2007 & purchased for $590,000
Settlement March 2013
Tax Deductions form March 2013 – June 2013 = $7,500