An area often overlooked when dealing with investment property is the benefit of depreciation and capital works allowance. Depreciation and capital allowance can turn part of your purchase price into a tax deduction, effectively putting more money back in your pocket. This works by separating the building and land components of the property.
When assessing available deductions two main elements are taken into consideration:
• Capital Works Allowance and
• Plant and Equipment
Capital Works Allowance
Capital Works Allowance deals with the structural element of the building including extensions, renovations and improvements. Basically, incorporating anything that is “irremovable” from the property. Buildings that were built pre 18th July 1985 may not qualify unless they are commercial or a renovation or extension has been completed since this date. Depending on when construction took place the rate of building write off will be either 2.5% or 4.0%. These rates may sound insignificant however, they can be claimed for up to 40 years from the date of construction.
E.g. Construction cost of a residential home = $300,000.
Written off @ 2.5% = $7,500 per year for 40 years.
For properties which share common areas there are potentially further advantages. For example, you may be entitled to a deduction for a percentage of the decline in value of common areas such as lifts, swimming pools, etc.
Plant & Equipment
Plant and equipment includes items which are easily removable from the property. These are items which will decline in value at a rate faster than the building itself. The Australian Taxation Office (“ATO”) has a definitive list of the useful lives of such plant and equipment and this determines the applicable depreciation rate.
E.g. The ATO useful life of ovens, range hoods and cook tops is 12 years. Therefore at a cost of say, $4,000 the depreciation deduction would be $333 per year for 12 years. Expand this over all plant and equipment in the property and the deduction available each year can be quite substantial.
The deductions you obtain effectively reduce the cost base of the property which means you may pay more capital gains tax when you sell however, considering the time value of money and the 50% CGT discount you are better off having a deduction now than in the future.
In order to maximize the tax benefit of your investment property we recommend the use of a qualified Quantity Surveyor to obtain a depreciation report to substantiate your claim. The cost of this report varies but is generally returned through increased deductions relatively quickly. Baggetta & Co can facilitate this process for you.
If you would like to discuss any of the above in more detail or in relation to your specific property, please don’t hesitate to speak to Paul Baggetta.
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