Three tax return mistakes that could cost property investors thousands


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Investment property owners make three costly mistakes when it comes to maximising their tax refund.

Property investors can claim sizable tax deductions for the natural wear and tear that occurs to a building and its fixtures and fittings over time. These deductions are known as property depreciation.

Specialist quantity surveyors can estimate construction costs for depreciation purposes, yet many people fail to engage one and miss out on claiming valuable dollars back at tax time.

property investors depreciation mistakes

Here are three most common depreciation errors.

1. Getting the depreciation category wrong

There are two types of depreciation deductions: capital works (Division 43) and plant and equipment (Division 40). It's often not immediately clear which category an item belongs to, and in some cases an asset can be split between both.

Capital works are claimed for the wear and tear of a building's structure and the items permanently fixed to the property, such as doors and windows. Capital works are typically depreciated at an annual rate of 2.5% over 40 years.

Plant and equipment items can be easily removed, and include things like blinds, hot water systems and furniture. The condition, quality and effective life will determine the allowances available for a plant and equipment asset.

Many investors mistake floating timber flooring as permanently fixed to the building and therefore a capital works deduction when it's actually removable, making it a plant and equipment deduction. This could mean the difference between $250 and over $1300 in first year deductions.

A ducted air conditioning system is another example, where the unit itself is considered plant and equipment while the ducting for the same unit falls under capital works.

Claiming an entire ducted air conditioning unit under Division 43 would result in substantially higher but incorrect first year deductions, which would come under ATO scrutiny.

2. Assuming depreciation on older properties can't be claimed

Research shows that new properties hold the highest depreciation deductions, but many people mistakenly think that depreciation can't be claimed on older properties.

Legislation introduced in late 2017 means that depreciation of second-hand plant and equipment assets can no longer be claimed. Yet capital works deductions remain unaffected and make up the bulk of a depreciation claim on an investment property, regardless of whether it is new or second hand.

Second-hand property owners can still claim depreciation on all qualifying capital works deductions that, on average, make up 85-90% of the total claim. They can also claim all new plant and equipment assets they purchase for the property.

During the 2019-2020 financial year, we found an average depreciation claim of more than $8300 for our clients' properties.

3. Overlooking deductions

Many depreciation deductions are easily missed by the untrained eye, especially on assets that have been installed by others. Substantial renovations where all, or substantially all, of a building is removed or replaced can hold significant deductions - even when completed by a previous owner.

Some examples of substantial renovations include replacing foundations of the building, walls, floors, the roof or staircases. These renovations can hold tens of thousands of dollars in deductions for the new owner.

When an investor purchases a second-hand property immediately after a substantial renovation, the 2017 legislation changes don't apply.

This means the new owner can claim depreciation on all new plant and equipment assets and the capital works.

Property investors should look to contact a specialist quantity surveyor for advice on what deductions are available.

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Bradley Beer is CEO of BMT Tax Depreciation. He is a member of the Australian Institute of Quantity Surveyors, the Royal Institute of Chartered Surveyors and the Auctioneers and Valuers Association of Australia.
Megan Smith
July 29, 2020 9.34pm

Hi, when working out CGT for a deceased estate Tax return on a rental property that was sold mid way through the FY I am wondering if I can use the property management fees and other expenses relating to the rental of the property(that have not been claimed already) against the capital gain rather than as a deduction against that years rental income?

I'm asking as the rental income was around $10K with non other income and the CG is around $400k before the 50% discount and I feel it would make sense to apply the rental expenses to the CG to minimise the gain?