Depreciation; is it all it seems?
31 August 2016 Ken Raiss Director Chan & NaylorAustralia’s Leading National Property Accounting Group
There is more to depreciation than first meets the eye. As a property investor you know the benefits of being able to have the effect of wear and tear on your property as an expense. Depreciation and any other expenses are available on investment assets used to create assessable income. However unlike most other expenses depreciation is not a cash drain on your cash flows. It can actually boost your cash flows after tax benefits.
The two main categories of depreciation centre around the building (capital works) and fixtures and fittings. The rate at which depreciation is charged on fixtures and fittings is effectively the assets useful life where as the rate for capital works is dependent on the date of acquisition.
Depreciation has a hidden sting. The capital works charge needs to be added back on the sale of the property to effectively reduce the cost base which has the effect of increasing the profit. For fixtures and fittings it is assumed that the property’s sale price includes the written down value of these assets so there is no impact on the profit. All is not as bad as it seems as any tax benefits on the yearly depreciation on capital works would have been at the taxpayers marginal tax rate whereas the sale would have the benefit of the 50% general capital gains discount unless owned in a company structure. Another trap for capital works depreciation is the possibility that it can be added back twice (more tax) dependent on how it was charged so you need to speak to your specialist property accountant.
With an increasing number of property investors renovating their investment properties to improve returns many are missing out on a hidden tax gem. When you renovate you are usually throwing out old and obsolete fixtures and fittings such as kitchen cabinets, floor coverings, bathroom fittings etc. If this is the case you should get a scrapping schedule from a qualified quantity surveyor who will attribute a value to all these items (one man’s junk is another man’s treasure) and you are entitled to claim a full tax deduction on this value. Many investors are surprised at the value even on much older properties. After the renovation the quantity surveyor would prepare a new depreciation schedule for ongoing purposes.
For the property developer who buys a parcel of land with a building and demolishes the building to construct new properties a write off may be available on the whole building so again speak to your specialist property accountant who can advise you on your rights.
There are many other little known strategies to improve returns on investment properties and the savvy investor will ensure they have access to these by consulting a specialist property accountant who can work with them to maximize the property returns even in a low capital growth market.
If you intend to rely on any of the information in this document to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor, its officers, employees, directors or agents.
Date: 27 July, 2016