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What depreciation questions are clients asking us this tax season?

Tax season is when we get asked lots of questions.  Sometimes it’s clients who don’t use an accountant. Sometimes it’s accountants who are unsure of something. We’re always happy to answer questions – even if it means us doing a bit of research. That’s why so many clients and accountants use Depreciator.

Perhaps you have a question? Feel free to email us at enquiries@depreciator.com.au. Or perhaps you need to order a Depreciation Schedule? You can do that here.

So what are the main questions people have been asking this tax season?

  • There is the perennial confusion over whether work done to a property during the year can be expensed as a repair or if the work needs to be depreciated as an improvement.
  • How to treat furniture. With that pesky virus a distant memory, Airbnb has come roaring back and people are turning some rentals into furnished short term accommodation.
  • Special Levies are always asked about. The nature of the work being funded and the timing of that work are the relevant things with them.

One question we are never asked is, ‘Why is my Depreciation Schedule taking so loooooonnnnng?’ That’s because our turnaround time is still the quickest in the industry.

 

One person wearing a blue shirt holding a tape measure, while another man holds it at the other end, measuring a door way of a property they are renovating.Repairs vs Improvements

Repairs and Improvements are  something that always confuses people. We covered this at length in a previous newsletter.

Repairs can be claimed at 100% immediately, so it’s no surprise people are keen to do that.

It’s equally of no surprise that the ATO are less keen for people to expense things that really should be depreciated – sometimes over 40 years.

The main thing that confuses people is the ATO’s definition of repairs. To the ATO, work can only be claimed as a repair if it deals with damage or deterioration that happened while YOU were renting out the property. You can’t claim for problems that were there before you started to rent out the property.

The ATO are on the lookout for people incorrectly claiming repairs, so it’s best to take care. Don’t hesitate to call to get our opinion. And if it turns out that work you have done needs to be depreciated, we will update your Depreciation Schedule free, as always.

A living room with a blue wall, furnished to rent out on Airbnb. The blue couch, rug, coffee table, wall hangings, sideboard and rug have been purchased new and can be claimed for depreciationIf you furnish a property, be careful how you claim it. 

Airbnb came roaring back after COVID and the ATO were waiting.

Did you know Airbnb shares income data with the ATO? We covered this in a previous newsletter, too.

When people started returning properties to the short term rental market, they invariably needed to furnish them.

Some people used spare furniture they had at home, or bought second hand things on Facebook Marketplace. If the furniture is used, it cannot be depreciated.

Other people buy brand new furniture which can be depreciated. If you need to add this new furniture to your Depreciation Schedule, we have a link where you can add the furniture to your Schedule free of charge. Get in touch, and we can email this link to you.

A white apartment building with balconies. Special levies apply to properties like this when there is not enough money in the the sinking fund to cover the work required.The treatment of Special Levies 

The treatment of Special Levies can be tricky. We covered this recently in one of our affiliate newsletters.

Special Levies are treated differently to the regular contributions people make to sinking or admin funds.

The nature of the work funded by the Special Levy, and when you started to rent out the property, are both relevant.

The main thing to remember is that if the Levy was used to deal with problems that existed BEFORE you started to rent out the property, it can’t be claimed as a repair. You will need to depreciate it at 2.5% per year.

An accountant in a dark blue suit talks to his client in a white shirt, referring to his computer and some printed documentation explaining the answer to a question about depreciation.You might have some questions of your own.

If they are not covered in our eBook, send us an email to enquiries@depreciator.com.au.

And if you have a property you are thinking about getting a Depreciation Schedule for, send us an enquiry and we can look at it online and have a sensible discussion with you.

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Made changes to your rental property?

If you have made changes to your rental property, you might need to change your Depreciation Schedule. And if you are late lodging your 2022 tax return, you’ll need to do that quickly. All you need to do is email enquiries@depreciator.com.au and let us know, what you added, when you added it, and how much it cost.

Luckily, we have a very fast turnaround for that sort of thing. And in most cases, there is no charge. We have a fast turnaround for everything we do, which is no surprise given we have been doing this for over 20 years. That’s why more and more investors and accountants are turning to us.

But let’s have a closer look at repairs vs improvements and how to claim each of them.

Two tradespeople making changes to an investment propertyThe ATO’s definition of a repair might surprise you

Generally speaking, a repair means to ‘restore something to the condition it was in when YOU started to rent out the property’. 

The longer you have been renting out a property for, the greater the scope to claim work as repairs. And repairs of course are an immediate 100% deduction, which is why people try to claim work as repairs – and why the ATO is on the lookout for incorrect claims.

Anything you do before you rent out a property CANNOT be claimed as a repair.

A new kitchen featuring a white marble island bench with a sink featuring black tapware, timber cupboards and overhead hanging pendant light. If you do work on a property that makes it better than it was when you decided to rent it out, you have improved the property.

That means you need to depreciate that work.

Let’s say you decide to install new benchtops in a kitchen before renting out the property because the existing ones are a bit tatty. You are improving the property and need to claim that work at 2.5% per year.

The same applies to carpets and appliances. Even if they are in poor condition, if you install new items before rental, you need to depreciate those items, though of course, they depreciate more quickly than structural work.

Want to read more on this? Grab a copy of our FREE eBook.

An accountant in a blue jacket shaking hands and smiling at her client in a grey jacket.If you need a new Depreciation schedule for a recently purchased property, please get in touch. You can call us on 1300 660 033 or you can make an enquiry online.

If you book a job through our website, you’ll even get a discount.

 

 

 

If you have an older property and you aren’t sure if there is depreciation in it, give us a call on 1300 660 033. You could be surprised.

It’s always worth a call. Check out our guarantees too, for added peace of mind.

 

 

 

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Do you know how to treat a Special Levy payment?

A close up view of concrete cancer, with the concrete peeling away to reveal the steel structure within rusting. Concrete cancer can reveal itself in apartment buildings and may need remedial work to be repaired.

This is the time of year when we get lots of clients contacting us about the tax treatment of Special Levies that were imposed on them last tax year.

Most clients of course think (or hope) a Special Levy payment can be expensed, like sinking fund or admin fund contributions. But we, and you, know better than that.

We are always happy to chat to your clients and tease out the information we need to suggest how the Special Levy should be treated.

The first thing we ask them is what was the purpose of the Special Levy.

Then we ask them when they started to rent out the property.

Armed with the answers to these questions, we can make a suggestion.

Do you have a client you would like us to have a chat with? You can make an enquiry here. It doesn’t have to be related to a Special Levy, it can just be a new enquiry for a Depreciation Schedule, too. We’re here to consult with your clients to determine the most sensible option for them. 

Key Points:

  1. Special Levies are imposed when a building has problems and there is insufficient money in the sinking fund to deal with those problems. 
  2. The longer a client has been renting out a property, the greater the chance of claiming work as repairs rather than improvements.
  3. If a client has only recently started to rent out a property and the building problem existed before then, it’s not a repair and they need to claim the Cap Works at 2.5%.

The corner of the top level of an apartment building where the concrete is peeling away from the buildingLet’s look at the purpose of the Special Levy

Special Levies tend to be imposed when a building has problems that have become apparent and there is insufficient money in the sinking fund to deal with those problems.

In the last month, we have had clients contact us about Special Levies that have been required to deal with a failed roof membrane, concrete cancer, and a collapsed (subsidence) driveway. 

One of these resulted in a $35,200 Levy for that client, so there is an understandable hope that it can be expensed because ‘that work was a repair, right?’

Not so fast, we said. ‘When did you start renting out your property?’

A work person replaces some roofing membrane on the top of an apartment buildingWhy is the date of first rental relevant to Special Levies?

As you know, the ATO’s definition of a ‘repair’ in general terms is to deal with damage that occurred while a client was renting out a property. The longer a client has been renting out a property, the greater the chance of claiming work as repairs (vs improvements).

If a client has only recently started to rent out a property and the building problem existed before then, it’s not a repair and they need to claim the Capital Works at 2.5%.

Last year we had a client who came up with what they thought was a cunning plan. 

They knew there was a Special Levy coming. It had even been minuted in the previous year’s annual strata meeting. Their idea was to rent out their apartment before the Special Levy notice came to them and then claim that work as a repair. We let them down gently.

Of the above three examples above, the failing roof membrane was a problem known about for years. So was the concrete cancer. The driveway collapse was a bit of a surprise – a broken stormwater pipe undermined it and a removalist truck finished the job. This was a legitimate repair – insurance did not cover the whole cost.

A close up of a wall with concrete cancer, where the steel structure supporting the concrete rusts, expands, and the concrete cracks and blows off in places. It can be expensive to correct.A case study in concrete cancer

More than half the enquiries we get about Special Levies are related to concrete cancer. Concrete cancer occurs when the steel work in concrete rusts and expands and the concrete cracks and blows off in places. It can be a terribly expensive thing to deal with.

Some years ago, we were engaged by the strata manager of an apartment building on the Sunshine Coast in Queensland to help them suggest to investment apartment owners how they could deal with the treatment of a Special Levy that was about to lob into their inboxes. 

The average Special Levy was $55,000 (the unit entitlement determines the exact amount), so it would have been a disappointing surprise to many owners.

We asked the strata manager to go back through the strata records and tell us when the spectre of concrete cancer first became apparent. Eight years prior. Yep – that’s a long time to kick a can down the road.

Knowing the nature of work and when the problem was first known, we then contacted all investor owners and asked them when they started to rent out their apartment.

Nearly all investors either bought their apartment less than eight years prior or had lived there previously and started to rent it out less than eight years prior. None of those owners could legitimately claim the Special Levy as a deduction because they started to rent out their apartment when the issue was very much known about.

There were a few owners who had only recently purchased their apartment and were very surprised about the Special Levy. We commiserated with them – it would have been mean spirited to suggest that a $300 strata report might have been wise investment given the estimated cost of the total job had been noted in the strata minutes for the preceding couple of years.

And there were some owners who had been renting out their apartments for almost twenty years. For those owners, we felt the cost of dealing with the concrete cancer could be expensed as a repair.

Do you have a client you would like us to have a chat with? Make an enquiry here.