Maximising your property claim
Property investors could guarantee more cash in their pockets this end of financial year by maximising property depreciation deductions.
A qualified quantity surveyor inspects a property and prepares a depreciation report which can then be used as a tax return. The property investor can claim the depreciation of the investment property against taxable income and in turn result in the property investor paying less.
There are two main elements to claiming a rental investment property deduction:
Plant and equipment (Division 40)
Division 40 is that part of the legislation that covers the depreciation of “plant and equipment”. That is, the removable fixtures and fittings within an investment property. Each plant and equipment item has an effective life set by the Australian Taxation
Office (ATO) and the depreciation deduction available on that item is calculated using this effective life.
Some of the Division 40 items commonly found within a property include hot water service, ovens, ceiling fans, dishwashers, range hoods and air conditioners.
Capital works deduction (Division 43)
Also referred to as ‘Capital Works Allowance’ or ‘Building Write-Off’, Division 43 covers the deductions available to owners for the structural elements of a building and the items within the property that are deemed irremovable. These items include the foundations, walls, ceiling, and roof. Other fixed assets like tiles, toilets, built-in cupboards, windows and doors also fall under Division 43. Properties qualify for this allowance depending on their age and type; either 2.5% or 4% of a property’s historical construction cost or estimated cost can be claimed by a professional such as a quantity surveyor.
Some items can be easily incorrectly classified when categorising them into a Division 40 or Division 43 deduction. For instance, a swimming pool falls under the Division 43 allowance, but the pumps for the pool qualify for Division 40.
When these assets are not classified properly, money is lost in the early financial years following the purchase. Often the obvious assets are classified as Division 40 and the more inconspicuous items are sometimes overlooked. This often results in them being combined with Division 43 and claimed at 2.5% instead of the much higher rate based upon their effective life. That may mean a significant difference in the deduction for the property investor.