June 2024
Lots of people think they can. They call us all the time with depreciation related ideas that range from just wishful thinking to bonkers. On May 23, Depreciator celebrated 22 years in business, and over that time we’ve heard them all.
Is it worth trying to be too clever? Is it worth that sick feeling when you read what cleverness the ATO are targeting this tax season? They are getting better and better at spotting taxpayers who are being a bit too ambitious.
And if they find you are being too ambitious with your depreciation claim, they’re not going to stop there. They’ll roll up their sleeves and have a look at everything else you’re doing. And you don’t want that – even if you’re squeaky clean.
We don’t give advice, but we hear people out and try to steer them back on the straight and narrow. That’s why so many investors and accountants use us.
One of the best ways to ensure compliance is to get a Depreciation Schedule from a reputable provider like Depreciator. You can do that here. This time of year, there are small operators who pop up with prices so cheap we know they are cutting corners. Then they’re gone.
How else can you make sure you stay off the ATO radar with your depreciation claims? Let’s look at some ‘don’ts’:
- Don’t claim your own labour for repairs or improvements
- Don’t confuse repairs with improvements
- Don’t claim Special Levies incorrectly
- Don’t use your holiday home and then try to depreciate the Assets
Don’t claim your own labour for repairs or improvements.
It’s tempting, we know. But not wise. A typical scenario is somebody decides to do a reno on a rental property. Let’s say it’s a new kitchen and bathroom.
They’re pretty handy and have watched lots of those DIY shows on telly, so they buy the materials and take a month off work and do a lot of it themselves. They might have a mate who is an electrician and another who is a plumber – reason enough to keep in contact with those people from school days.
Then they want to factor in labour when they claim depreciation on the job to boost the total cost of the work.
The ATO are very clear about this and there is an expectation that if asked, you will have all your receipts. If you take a month off work and turn your hand to tiling and painting, good for you. But don’t try and claim labour. If you get the wiring and plumbing done for beer and pizzas, don’t try and claim the cost of labour.
The ATO, not unreasonably, want you to only claim for money that you actually spend.
Don’t confuse repairs with improvements
In the recent ATO press release here, this is something being focused on this year.
We’ve written about this before. Often. Here is the most recent explanation.
There are some grey areas, but generally speaking:
- If you replace an entire Asset, like a cooktop, you need to depreciate the new one. If you fix the old one, that’s a repair, but if you replace it, you need to depreciate it. And yes, even if the old one was not worth repairing, you still need to depreciate the new one.
- If you do structural work to a property because of damage e.g. new cupboard doors, benchtops, tiling, painting etc, the damage must have occurred white YOU were renting out the property. You can’t fix problems that existed before YOU started to rent out the property and claim them as repairs.
Don’t claim Special Levies incorrectly
We get asked often by clients and accountants how Special Levies should be treated. And we have written about it often – most recently here.
We respond by asking two questions:
- What was the nature of the work?
- How long have you been renting out the property?
Like repairs vs improvements, there are some grey areas, but if the work funded by the Special Levy makes the property better than it was before YOU started to rent it out, it’s an improvement and not a repair and needs to be depreciated.
Typical things that require Special Levies are concrete cancer, roof leaks, failing windows and doors.
If you have only just started to rent out a property and a Special Levy has been imposed for, say, concrete cancer, that problem has existed for a long time even if you were not aware of it. So you will need to depreciate your Special Levy at 2.5% per year. Yep.
Don’t use your holiday home and then try to depreciate the Assets
This is another one we have written about before – see that here.
Some years ago, there was a change to the rules around the depreciation of second hand Assets: appliances, air con, hot water, floor coverings etc.
Treasury decided that the owners of brand new Assets could depreciate them, but depreciation could not be claimed on second hand or used Assets.
So if somebody buys, say, a 10 year old property, they can still depreciate the building, but the depreciation on the Assets need to be deferred.
This applies to furniture, as well.
So if you have a furnished holiday house and you use it yourself (who wouldn’t?) the furniture and all the fixed Assets are deemed second hand and you cannot claim depreciation on them. They might have been brand new when you bought the property, but when you use them yourself, they become second hand.
If you think you’re trying to be too clever and you’d like to have a talk about it, get in touch. If you have a new property you need a depreciation schedule for, call us on 1300660033, or book your Depreciation Schedule online here.
