Dear Annette,

Please feel free to contact:
 
Nick Perrett – JPH Group. Level 6/60 Albert Road, South Melbourne – Ph 9686 1100
Linda Luzza – F Trotta & Co. 505 Nicholson Street, Carlton North – Ph 9347 7607

They'll definitely be able to assist.

I hope this helps,

Hi Die Hard,

In that particular instance it would generally be viewed as a repair and therefore claimed as an immediate expense.

But, always best to discuss with your Accountant.

I hope this helps,

Hi All,

Very good question Freedom and some good answers from previous posts.

In this particular situation, with your parents having owned the properties since the early 1990's (assuming that the properties were built before July 18 1985) they won't be entitled to claim the 'special building write-off' also known as Div 43, and the plant & equipment assets will have fully depreciated by 2002 – ten years ago. This means unfortunately that there won't be any depreciation left for your parents to claim – unless they've spent big dollars on renovations in the last 5 years. Should the properties be built post July 1985 they will still be entitled to 4% (until the end of 2012/13 tax year) or post Sept 15 1987 – 2.5% over 40 years.

All plant & equipment assets have different effective lives, these generally last up to 15 years. Most of the assets can be written off quicker through the use of a low value pool. This is utilised when a correct depreciation schedule is prepared by a qualified Quantity Surveyor.

Unfortunately, in terms of claiming retrospectively, the ATO changed the ruling back in October 2008 from the previous 4 years to now only being able to go back the previous 2 years in missed deductions.

Now most people would agree that it's better to have that extra bit of cash in your pocket now, and pay a small percentage back when you sell the property (assuming you sell at all). Depreciation is an added bonus (when available), you claim it when you can and then if you do sell (after 12 months you're entitled to a 50% discount on CGT) you'll pay a percentage (at your marginal tax rate) back of 50% of the claim made. Meaning, you're still in front and it's cost you less to hold that property in the early years when it's the heavily negatively geared.

I hope this helps,

Hi All,

Only when a property is income producing are you able to claim depreciation. This covers the building (should it qualify i.e built between July 18 1985 @ 4% over 25 years and Sept 15 1987 2.5% over 40 years), all the fixtures & fittings such as carpets, blinds, kitchen appliances, hot water systems (regardless of their age as they are revalued upon settlement and their effective lives start again) and any previous renovations carried out by yourself or previous owners.

Repairs can only be claimed if you are actually repairing a particular asset NOT replacing it. If the asset is removed and replaced, it will be seen as an improvement. Improvements are classified as depreciable. If you are going to paint the property to improve it's value then the value of the painting will depreciate at 2.5% over 40 years. If painting is something you do every 12 months then it's a repair issue and you can claim it as an immediate expense through your accountant.

Even though you are renovating while the property is tenanted, and you intend on moving in within a couple of months, you'll only be entitled to claim depreciation for that short period of time which may not be an awful lot of deductions in the grand scheme of things.

I hope this helps,

Hi RC388,

As you are aware the fees for tax depreciation reports range from $99 up to $1,500 and all providers are claiming to get you more than the next person. The products available today vary as much as the fees and if anything the fee is probably the worst indication of quality for a few reasons.  Firstly, some organisations provide too much detailed unnecessary information (which confuses the client & their accountant) and hence charge ridiculous fees. Secondly, others supply a product which simply can't be used for taxation purposes and the majority supply a basic report that will satisfy the tax office requirements but will not maximise or structure deductions to increase the cash in your back pocket in the early years of investment property ownership. Put simply some do it better than others.

1. A reputable tax depreciation report should:
– be prepared by an Associate Member of the Australian Institute of Quantity Surveyors (AIQS visit: http://www.aiqs.com.au) who is also a Registered Tax Agent under the Tax Agent Services Act.
– use their own staff for inspections and not sub-contract (if you get audited the current tax legislation doesn't recognise professions such as valuers, real estate agents etc as appropriately qualified to prepare these reports).
– make sure they have a guarantee of at least double their fee in the first years deductions.
– include low value pooling & low cost asset immediate write off.
– include a detailed 20 year projection for all Div 40 assets (plant & equipment – kitchen appliances, carpets, blinds etc).
– include a 40 year projected total of deductions each financial year – the life of the property (a one-off report).
– show a break up of all common area plant & equipment (if it's a strata title property).
– have a guaranteed turn around time from the day of inspection of less than 7 working days.
– be tailored upon the client's inidivual scenario based on settlement date, purchase price etc.
– be pro-rated to assist with maximising the deductions in the first year of income.
– be structured to recoup missed deductions – upto the previous two financial years.
and finally contain both the Diminishing Value & Prime Cost methods of depreciation.

It's extremely difficult to prove which firms are doing what, but it's always best to get advice from your Accountant – at the end of the day, they are the person most qualified to point you in the right direction when choosing a tax depreciation report.

2. In regards to the relevance of a purchase price in the preparation of a tax depreciation report – when purchasing an investment property you either buy an established property or have one built. When it is built, you'll more than likely have a construction cost value which will be used to generate the tax depreciation report. This will be split into two sections: Division 43 (capital works or special building write-off) & Division 40 (plant & equipment assets) and your Land Value will be a given. When you purchase an established home your purchase price needs to be broken up into land value, construction cost & expenditure. The land value is a given at the time of purchase, the construction cost is then estimated at the time of purchase and then re-calculated at the original date of construction using building price indices and whatever amount is left over is known as expenditure. The expenditure is then used to increase the value of the plant & equipment assets throughout the home, and therefore increasing your depreciation deductions.

3. The valuation on the investment property should have been carried out at the time when the property first became income producing. This valuation will allow you to calculate the CGT made from the first day on income to when you sell (should you sell).

I hope this helps,

Hi RyanJD,

As you're renting out the additional rooms, you're not only entitled to claim a percentage on the interest charges & other expenses but you are also entitled to claim the same percentage on any tax depreciation claims available on the property.

Due to the fact that it's income producing, you can claim depreciation on all the fixtures & fittings and potentially the building (if it qualifies for building write off).

All in all it's going to put more money back in your pocket and will cut the weekly costs of owning this property quite substantially.

I hope this helps,

From a tax depreciation point of view –

The larger the unit development then the greater deductions will be available throughout common areas. As the complex possibly contains swimming pools, saunas, gyms, lifts, underground car parking, storage etc all of which you are entitled to claim a percentage of. In comparison to a medium sized development which may only contain common walkways, light fittings and a car port or garage.

As you look to purchase higher up in a unit complex understandably the construction costs get higher meaning your capital allowance claims (building write-off or Div 43 deductions) are higher as a result. Taking this into consideration may mean that instead of being able to claim approx $8,000 in the first year on a unit in a medium density complex compared to $12,000 in the first year on a higher density unit for the same purchase price.

The higher the depreciation deductions the less money this investment property will cost you week to week.

Just some food for thought…

Dear lulu1,

Depreciation is classified as a non-cash tax deduction and covers all depreciable assets within an investment property along with capital works (should the property qualify for building write-off). The amount mentioned of $3,500 will help reduce your overall taxable income. If your current marginal tax rate is 30%, you'll be entitled to a refund of $1,050 (based on the depreciation alone). Your total refund based on the scenario above will be (your initial loss $2,865 + depreciation deduction of $3,500) x marginal tax rate of 30% = $1,909.50 cash refund

To help determine the approximate amount of depreciation on potential purchases please feel free to use BMT's free tax depreciation calculator – http://www.bmtqs.com.au/TaxDepreciationCalculator.aspx?source=menu

I hope this helps.