1. What is a Tax Depreciation Schedule?
A comprehensive list of all the property allowances claimable under the Income Tax Assessment Act 1997 (ITAA 1997) prepared by a professional quantity surveyor recognised by the ATO as qualified to provide such information.
2. What is it used for?
The allowances are summarised in a yearly tax flow showing the amounts allowable as deductions in your annual tax return resulting in significant tax savings for each year of ownership of the property.
3. Who should obtain one?
Any investor who has purchased or constructed a building to produce assessable income such as rent.
4. What allowances are available?
The following allowances, where eligible, are summarised in a yearly tax flow showing the amounts allowable as deductions in your annual tax return resulting in significant tax savings for each year of ownership of the property.
4.1 Depreciating assets
Depreciating assets are claimable under Division 40 of the ITAA 1997. These include items such as carpets, blinds, ovens, cooktops and hot water units and are written off over a number of years based upon their effective life determined in Tax Ruling TR 2017/2. These are calculated from the settlement date of the property.
Under new legislation first announced in the Federal Budget on 9 May 2017 depreciation deductions will be limited to outlays actually incurred by real estate property investors. This means that depreciating assets included in existing residential properties purchased after 9 May 2017 will no longer be claimable. However, the claim will effectively be deferred until the sale of the property when it can be offset against capital gains tax if the property is sold for a profit. The value of obtaining a tax depreciation schedule for existing residential properties will therefore be maintained.
4.2 Capital works deductions
Capital works deductions are claimable under Division 43 of the ITAA 1997. These are based upon the historical construction cost of the property and vary depending on the commencement date of construction and type of building.
Residential properties can be written off at 2.5% per annum for buildings constructed after 15 September 1987. If construction started between 19 July 1985 and 15 September 1987 then it could be written off at 4% per annum although the period for claiming the 4% allowance has now expired.
If the building qualifies as short term traveller accommodation such as a hotel it can be written off at 4% per annum if building construction commenced after 26 February 1992. If construction commenced between 22 August 1979 and 26 February 1992 it can be written off at either 2.5% or 4% per annum depending on the actual commencement date.
4.3 Structural improvements
Structural improvements such as fencing, paths and other hard landscaping can be written off at 2.5% per annum if construction started after 27 February 1992.
5. But my residential property is over 20 years old!
Although the capital works deduction is not claimable for buildings constructed prior to 18 July 1985 the depreciating assets such as carpets, oven etc. are claimable from settlement if the property was purchased before 10 May 2017.
In addition any renovations carried out after 15 September 1987 will qualify for the capital works deduction.
6. I have recently carried out renovations
If the renovations were carried out after purchase then a separate report will be required. Alternatively the receipts can be handed over to your accountant for them to claim separately.
7. I had my property constructed by a builder
In this case the actual construction cost will be analysed and the schedule will take effect from completion of the building.
8. Is the cost of the land claimable?
No, this is non-eligible expenditure and will be excluded from the schedule.
9. How much will the schedule cost?
The standard fee is currently reduced to only $475.00 until 31 March 2018 for a normal residential house in the Greater Hobart and Launceston areas and is fully tax deductible. If you acquired a furniture package then an additional fee of $150.00 will be payable due to extra work involved. However this fee is insignificant compared to the additional benefits obtained.
Properties located outside the Greater Hobart and Launceston areas will be subject to separate quote to cover any additional travel allowance. Please call to discuss.
10. What will my allowances add up to?
This depends on a number of factors including the date of purchase, the age of the building, the purchase price paid and the extent and quality of the building and its components. As every property is different it is impossible to give an accurate indication without knowing this information.
11. But what if my allowances add up to less than the fee?
In this highly unlikely scenario M C Mars guarantees that no investor will be charged a fee if the allowances amount to less than the fee.
12. How long does the schedule last for?
The fee is a one-off payment for a 20 year schedule which is far longer than most investors will hold their property.
13. When do I have to have the schedules updated?
Only when significant alterations or additions are made to the property. Your accountant will be able to look after most items of additional future expenditure such as new blinds, carpets etc.
14. Why can’t my accountant prepare the schedules?
Only appropriately qualified persons such as quantity surveyors are allowed by the ATO to estimate construction costs in order to calculate the building allowances claimable. The ATO does not allow real estate agents or accountants to perform this task unless they are otherwise qualified.
If the value of depreciating assets is not included in the sales contract then the ATO requires an independent valuation to be carried out by a person such as a quantity surveyor.
15. What happens when I sell the property?
The ATO requires that the selling price is apportioned between the depreciating assets and the property. The cost base is reduced by the amount of the capital works deductions you claimed or were entitled to claim. Even if you don’t claim the allowances available to you then the ATO may take these into account when calculating capital gains tax.
A separate balancing adjustment is made on the depreciating assets which represents the difference between the asset’s termination value and its adjustable value at the time of the sale.
If you purchased an existing residential property after 9 May 2017 you will generally not be able to claim the decline in value of previously used depreciating assets. However, their value will be claimable as a capital loss if the property is sold for a profit.
The Tax Depreciation Schedule prepared for the purchase of the property will greatly assist in determining the tax liabilities at the time of sale.
16. I haven’t previously claimed any depreciation
The ATO allows you to request an amendment to your tax return, generally two years for individuals and small businesses and four years for other taxpayers. You can therefore backdate your tax claim to take account of your depreciation allowances accordingly.
How do I obtain my schedule?
Simply download the appropriate form from the following links and return the completed form and details to me by post or email so that I can organise an inspection of the property.
I look forward to assisting you maximise the returns from your property investment.
Malcolm C Mars MRICS