Many investors remain unsure about whether it is worthwhile obtaining a quantity surveyor’s tax depreciation report for a rental investment property particularly if it was built before 1987.
When a Quantity Surveyor completes an investor’s capital allowance and tax depreciation schedule, two main elements are generally included; being capital works deductions and plant and equipment depreciation. In order to produce these reports, amongst other qualifications, the quantity surveyor must be a registered tax agent, as the information contained in the report is specific tax advice.
Capital works deduction, also known as building cost write-off, refers to the tax deduction available for the structural element of a building including fixed irremovable assets such as the foundation, walls and roof, doors, windows, sinks and tiles.
Plant and equipment assets are considered to be easily removable or mechanical in nature. Plant and equipment assets are identified through ATO legislation as assets which have a limited effective life and can reasonably be expected to decline in value or depreciate over the time they’re used. Plant and equipment depreciation rates are calculated based on their effective life which is set by the tax commissioner, and updated regularly through tax rulings.
Current tax legislation states that any property built before 15th of September 1987 (residential) and 20 July 1982 (non-residential) cannot claim the capital works allowance as a deduction. This often results in the investor not thinking to obtain a depreciation report as they believe that their property is too old. However it is worth enquiring about any property – even one that is 100 years old!
We have had a recent example of a property which despite being constructed prior to 1987 had extensive renovations prior to sale, resulting in over $95,000 of eligible capital works to claim by the new owners. This translates to an annual deduction of more than $2,400 until the capital works are written off entirely. At the other end of the spectrum, a client had extensively modified commercial premises for a new tenant, with a total capital works amount of $1.57m, or an annual deduction of more than $50,000.
In the unusual event that a property will not contain some eligible capital works to claim, the investor will still be eligible to claim depreciation on any available plant and equipment.
Additionally, if extensions or renovations were completed after 1982 (non-residential) or 1987 (residential), that component of the building cost will qualify for capital works deductions.
Another often overlooked deduction is where any existing capital works qualifying for the deduction, are demolished as part of a larger renovation or development project. In this situation a deduction may be available for the remaining original construction cost (as determined by a quantity surveyor), less any amounts deductible to the date of demolition.
In the case of older properties, as noted above, a tax depreciation report covers not only any capital works allowance, but also depreciation of plant and equipment. This means that all properties generating rent should be eligible to claim a deduction for the plant and equipment items contained within the property. Some of the more common examples include:
- Hot water service
- Carpet, vinyl & floating flooring
- Blinds & curtains
- General furniture
If you are unsure whether your investment property, (commercial or residential), could benefit from a quantity surveyors report, or how to proceed with obtaining one, please contact us for further information.