We’ve been fielding a few new questions about depreciation of late, which makes a welcome change.
Sometimes new questions are in response to misinformation put ‘out there’ by people with a loose grasp of the rules. We have written previously here about the rise of ‘finfluencers’. Yes, it really is a thing. They are people posting ideas on social media and being rewarded for that.
Sometimes, the misinformation is coming from people deliberately trying to mislead prospective investors. There is some mischief going around about NDIS houses of late.
And sometimes there are genuine errors made by people who should know better. There was an online article recently about the Low Value Pool that made some howlers. We would put a link to the article here, but it would embarrass someone. So we’ll just explain the Pool as clearly as we can.
Before we get to that, if you have an appointment looming with your accountant and you have just realised you need a Depreciation Schedule, or if you need to update your existing Schedule, get in touch ASAP and make an enquiry here or call our team on 1300660033. Be sure to let us know if it’s urgent – we are still the quickest provider out there.
Key Points:
- 1. Depreciation returns can be higher with NDIS houses because the build cost is often higher and greater number of Assets are included in the property.
- 2. The Low Value Pool (LVP) is an optional grouping of Depreciating Assets each valued at between $300 and $1,000. Assets in the Pool depreciate at 18.75% in the first part year and 37.5% per year after that on the diminishing total.
- 3. Not all properties need a physical inspection. Where the build costs are known, these costs must be used.
- 4. Keep your Depreciation Schedule up to date with any recent changes or renovations to maximise your tax deduction each year.
Do NDIS houses have higher depreciation entitlements than other houses?
Twice recently, we’ve had people call us and say that they were told NDIS houses had higher depreciation entitlements than other houses. We assume that this thought bubble came from somebody selling NDIS property.
There was nothing in writing (perhaps deliberately) from the people making the claims, but the clients who called us were adamant about what they had been told.
We do lots of Depreciation Schedules on NDIS houses. They certainly have captured the attention of investors.
They cost more to build per square metre than a standard project home – possibly because the builders of them can get away with it. After all, if a company specialises in building NDIS homes, they are a standard home for them.
Anyway, if a home costs more to build, there is more depreciation to claim – it is driven in part by the build cost.
Often there will also be Assets not found in a typical home, like a UPS system. That stands for Uninterrupted Power Supply. It is a battery backup charged by mains power that kicks in automatically if there is a power outage to the home.
One company we do work for always installs a Foxdry in the garage. They are ceiling mounted clothes drying racks that are automated and sometimes heated. We spot them because we know what to look for.
Sometimes there are also automated benches in the kitchen that can be raised and lowered.
And there can be multiple small fridges and air cons.
So yes, depreciation returns can be higher with NDIS houses, but that is solely due to the often higher build cost and greater number of Assets.
What is the Low Value Pool?
We had a client once who called us up and told us, a bit unkindly, that we had inspected the wrong property because her Depreciation Schedule had something she knew for a fact was not in the property.
A pool.
It turned out that she was looking at the table for the Low Value Pool. We accepted her apology gracefully.
The Low Value Pool (LVP) is an optional grouping of Depreciating Assets each valued at between $300 and $1,000. When we write ‘optional’ that’s because investors don’t need to use the Pool, but who wouldn’t?
Assets in the Pool depreciate at 18.75% in the first part year and 37.5% per year after that on the diminishing total. That first ‘part year’ may only be a few weeks long, which is why savvy investors will often wait till June to add new Assets to their property.
Let’s say a new $950 oven is added on June 20 to a property. For the last 10 days of June, depreciation of $178.12 can be claimed on that oven. The written down value of the oven is then $771.87.
In the second year, depreciation is $289.45 i.e. 37.5% of the written down value. And so on.
Now, what exactly is a Depreciating Asset? This is something that trips a lot of people up. Depreciating Assets are things like appliances, floor coverings, blinds and curtains, fans, heaters etc.
Depreciating Assets are NOT things like door locks, shower screens, paint, cupboard doors, tiles, taps, and many, many other items that are regarded as Capital Works i.e. depreciable at 2.5% per year.
The ATO have a great publication with a very clear table that lists hundreds of items and categories them into Asset vs Capital Works. You can find it here.
Will my property need a physical inspection?
We have written before here about whether all properties need to be inspected for the purpose of putting together a Depreciation Schedule.
They don’t.
Of course, some providers will tell you otherwise. And charge you more to inspect. Surely a higher fee is not the reason they are so keen to inspect a property?
If somebody has a house built for them, the cost to build that house must be used as a starting point. This a requirement in the legislation – ‘if the costs are known, they must be used’.
Then it’s a matter of valuing the Assets in the property, and a good building contract will have a description of these.
What if somebody buys a 10 year old house? If it’s a project home in original condition and there is lots of information available, it’s not hard for us to estimate the build cost 10 years ago.
Renovations? Again, if it’s a simple renovation done by a previous owner, like a new kitchen and general freshen-up, it’s not hard to do that without an inspection.
But we hasten to add, that if somebody really wants their property inspected, we will of course do that. And we will send someone with appropriate skills and qualifications to estimate the historical cost of Capital Works.
And there are also occasions where we dig our heels in and push for an inspection. It might be an old property with lots of renovations. It could be a property on a tricky site. Perhaps simply an expensive build. These are the properties where an inspection will be worth doing.
How do I update my Depreciation Schedule?
Keeping your Depreciation Schedule up to date with any changes is a great way to maximise your deductions at tax time.
Did you know we do free updates?
As often as you need them done?
All we need to know is what you have added to the property, when you added it and how much it cost – no need to email receipts.
And if you want to have a chat about whether some of what you want to add can be expensed as repairs instead, we’re all ears. Give us a call on 1300660033.
Do you have a residential or commercial property you would like us to help you claim depreciation for? Or a question about depreciation?
Order online now or call us on 1300 660 033 and rely on our 20-plus years of experience in estimating depreciation returns.
