Maximising Tax Benefits with a Property Depreciation Schedule
For Australian property investors, understanding and leveraging tax benefits is crucial to maximising returns on their investments. One of the most powerful tools in an investor’s arsenal is the property depreciation schedule. This comprehensive guide will explore how to make the most of your property depreciation schedule and optimise your tax benefits.
What is a Property Depreciation Schedule?
A property depreciation schedule is a detailed report that outlines the decline in value of your investment property and its assets over time. This document, prepared by a qualified quantity surveyor, allows you to claim tax deductions for the wear and tear on your property and its contents.
The Importance of a Professional Inspection
One of the most critical steps in maximising your tax benefits is obtaining a professional on-site inspection. According to the Australian Institute of Quantity Surveyors, an on-site inspection by a qualified quantity surveyor is the most reliable way to ensure you’re claiming the maximum allowable deductions.
Key benefits of a professional inspection include:
- Identifying all depreciable items, even those that aren’t immediately visible
- Ensuring compliance with ATO regulations
- Maximising your deductions by uncovering often-overlooked items
Understanding Depreciable Assets
To fully leverage your depreciation schedule, it’s essential to understand what can be claimed. Depreciable assets fall into two main categories:
- Capital Works Deductions: These relate to the building’s structure and permanent fixtures. They can be claimed at 2.5% per year for 40 years for residential properties built after 15 September 1987.
- Plant and Equipment: This category includes removable assets like carpets, appliances, and blinds. The depreciation rates for these items vary based on their effective life.
Strategies to Maximise Your Depreciation Benefits
1. Claim from the Settlement Date
Ensure your depreciation schedule covers the period from your settlement date, not just from when tenants moved in. You can claim depreciation from the moment the property becomes income-producing.
2. Consider the Diminishing Value Method
For plant and equipment items, the diminishing value method often provides higher deductions in the early years of ownership. This can be particularly beneficial if you’re planning a short-term investment strategy.
3. Take Advantage of Immediate Write-Offs
Some assets valued under $300 can be written off immediately. Ensure your quantity surveyor identifies these items to maximise your immediate deductions.
4. Don’t Overlook Common Areas in Strata Properties
If you own a unit or apartment, you may be entitled to claim a portion of the depreciation on common property areas. Make sure your depreciation schedule includes these elements.
5. Update Your Schedule After Renovations
If you renovate your investment property, it’s crucial to update your depreciation schedule. New additions or improvements can significantly increase your claimable deductions.
6. Backdate Your Claims
If you haven’t been claiming depreciation, you may be able to amend previous tax returns (generally up to two years back) to claim missed deductions. Consult with your accountant about this possibility.
The Impact of 2017 Legislation Changes
It’s important to note that legislation changes in 2017 affected depreciation claims for second-hand residential properties. These changes mean:
- For properties purchased after 9 May 2017, investors can only claim depreciation on new plant and equipment assets they purchase themselves.
- However, capital works deductions are still available for the building structure and fixed assets, regardless of the property’s age.
Case Study: The Power of Depreciation
Consider this example:
Sarah purchased a 10-year-old investment property in Sydney for $750,000. After obtaining a depreciation schedule, she was able to claim:
- $6,500 in capital works deductions in the first year
- $4,800 in plant and equipment depreciation
This total of $11,300 in deductions significantly reduced her taxable income, resulting in a tax saving of approximately $3,700 (assuming a marginal tax rate of 32.5%).
A well-prepared property depreciation schedule is an invaluable tool for Australian property investors looking to maximise their tax benefits. By understanding the nuances of depreciation, leveraging professional services, and staying informed about legislative changes, investors can significantly enhance their cash flow and overall returns.
Remember, while this guide provides general advice, every investment property is unique. It’s always recommended to consult with a qualified quantity surveyor and your accountant to ensure you’re maximising your specific tax benefits within the bounds of ATO regulations.
By taking a proactive approach to property depreciation, you can turn what many see as a complex aspect of property investment into a powerful strategy for financial success.