Appreciation of depreciation can be difference between profit and loss

More than three million people a year in Australia claim upwards of $50 billion every year in property rental deductions but many are missing out on one of the most significant slices of the tax deduction pie.

Recent research from Chartered Accountants found that an average of more than $15,000 was claimed for rental tax deductions, with the second largest portion of this comprising depreciation on building and fittings, worth an average of $9,250 in claims. 

BMT Tax Depreciation recently analysed their investor database and found that a great deal of property investors overlook depreciation.

“In the last three years, more than 25,000 people who have come to BMT for a tax depreciation schedule have been missing out on claiming any depreciation in previous financial years,” BMT chief executive Bradley Beer revealed. 

Depreciation is the natural wear and tear of property and assets over time. It is the second-largest tax deduction available for investment property owners after loan interest, yet Mr Beer said the company has seen tens of thousands of investors neglecting to claim depreciation to its full potential. 

“Property depreciation isn’t the same as other tax deductions — investors don’t need to spend any cash to claim it, which is why it’s easily missed and people don’t realise it can be claimed for up to forty years,” Mr Beer said. 

“If an investor buys a new four-bedroom house for $750,000, they could expect a first-year deduction of more than $16,000, while the cumulative five-year deductions would be around $67,500.” 

Mr Beer continued to explain that it’s not just the large, expensive investment properties that result in thousands in depreciation deductions.

“A second-hand, two-bedroom unit purchased for $550,000 can still result in a first-year depreciation deduction of more than $6,500 and cumulative five-year deductions in excess of $27,000.” 

Simon Gold, director of taxation services at Australasian Taxation Service, said there were a few reasons people overlooked potentially lucrative depreciation claims.

“Some investors are simply unaware of its existence, some have the false belief that they have no depreciation value on their old building but neglect to include newer assets such as a pool or strata property elevator, while some people just baulk at the cost of obtaining a quantity surveyor’s depreciation schedule,” Mr Gold said. 

Simon Gold says accountants and tax experts are crucial for an investor to maximise their returns.

For any property built after 1985, it is obligatory to engage a quantity surveyor to evaluate the depreciation.

Mr Gold said that although there were some rules and complications around the tax laws, the process was still easy.

“Contact a quantity surveyor, they’ll prepare the depreciation schedule and quite often they don’t even have to carry out a site visit.

“Once you’ve purchased your depreciation report, a qualified tax accountant is best placed to make sure you’ve maximised your rental property claims, including depreciation for fixtures and fittings,” he said.

As well as claiming tax deductions on the decline in the building's structure, claims are also made on chattels, which are permanent fixtures to the building, and equipment assets, for example, ovens, carpets, blinds, kitchen cabinets, and more.

“An accountant will also be able to point out any quirks of the tax laws that the average investor wouldn’t know about, such as co-owned investment properties benefiting from obtaining separate depreciation schedules for each person’s portion of the property,” Mr Gold said.

BMT’s Mr Beer said investors who have not been claiming depreciation could still claw back some missed dollars. 

“It’s quite straightforward to amend two previous years’ tax returns with our schedules, but anything beyond this can get complex and come under tax commissioner scrutiny, so it’s best to get on top of it early,” he said. 

“Claiming depreciation can be the difference between a negative and positive cash flow. 

“We see it helps investors build equity and grow their portfolios throughout their investing journey,” he concluded. 

For residential properties, buildings are depreciated for 40 years at 2.5 per cent per year in a straight line (i.e. the same amount every year). This compares to commercial premises that are depreciated at 4 per cent per annum. Land value is not depreciable.