Is it August already?
We’re deep into the second wave of tax season.
The first wave is in June when people who have recently purchased an investment property ask us for a Depreciation Schedule.
The second wave is when people start seeing their accountant and are told to get in touch with us. Most of our work comes from accountants. Always has – 23 years and counting. Accountants know that we know what we’re doing.
Are you one of those people? If you need a new Depreciation Schedule – you can make an enquiry here.
If you have an existing Schedule, did you know we do free updates?
Do you need clarification on how to treat work you have done to your property? We write about this often.
Now, back to those ‘misunderstandings’.
‘I thought my property needed to be inspected?’ is something we’ve been asked a lot this year.
‘Can I speed up my depreciation?’ is another one.
We have also had a lot of people thinking they can claim more than they spend on a reno.
And there has been some confusion around the treatment of second hand Assets in commercial properties.
Key Points:
- 1. Properties don’t always need inspection to prepare a Depreciation Schedule. If you’ve built a property and have your build contract, your actual costs must be used to prepare your Schedule.
- 2. We can’t make depreciation go faster – effective lives of Buildings and Assets are dictated by the ATO.
- 3. You can’t claim more than you spend on a renovation. You can only claim depreciation on the money you’ve actually spent.
- 4. Different rules apply to commercial properties. Second hand Assets can be depreciated in commercial properties, and the building depreciation rate can vary for manufacturing and short term traveller accommodation.
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1. ‘I thought my property needed to be inspected?’
Somebody out there must be telling people more loudly than usual that their property has to be inspected for a Depreciation Schedule.
At a higher fee.
It’s not the case at all.
If the property is a newly built house and there is a decent building contract, it will have most of the information needed for a Depreciation Schedule. And under the legislation that governs us, the known build cost must be used. You can read more on that here.
Sure, the Assets will likely need to be costed, but that’s not a big deal if we know what’s there. And there might have been extras after handover, but you’ll know what they cost – you paid for them.
We even have some accountants who refer people to us with second hand properties who state specifically that they just want the historical build cost excluding Assets and don’t believe a visit is necessary. If it’s a standard house and there is plenty of information available, they are likely correct.
But sometimes there is not enough information available. Or it’s a tricky house. In these cases we will often need to inspect the property to get you the best result.
2. ‘Can you speed up my depreciation?’
We have had a run of people asking us to ‘speed up’ their depreciation.
Often they tell us that they only plan to keep the property for a little while and therefore want to claim all their depreciation in five years or so.
If only that were possible.
Eligible buildings depreciate at 2.5% per year. That is driven by their 40 year Effective Life as set by the ATO. You can read more on this here.
There is no way to fast forward any future depreciation regardless of how long somebody plans to keep a property.
Assets, of course, depreciate more quickly than buildings. Appliances, carpet, curtains, air con, hot water units etc all have Effective Lives much shorter than 40 years and depreciate more quickly.
Assets costing under $300 can be written off immediately.
Those costing between $300 and $1,000 can be depreciated at 18.75% in the first part year of ownership – even if that’s only a few weeks. Then it’s 37.5% per year after that on the diminishing total.
And that’s pretty quick.
3. ‘Can you estimate depreciation for my reno based on retail value?’
Just this week, we had a client wanting us to update their Depreciation Schedule because they had done a renovation.
No problem there – we do free updates all the time for our clients.
We have a checklist we use to capture the costs. It asks for the total reno spend and specific costs for the Assets.
It’s very easy.
This client instead wanted us to estimate the reno cost from photos and a description of the work. Remember, this was a rental property with an existing Depreciation Schedule that was just being updated.
The client told us they weren’t sure what the reno cost – big red flag there.
We pressed the point and it turned out that they did most of the work themselves and had some tradie mates who lent a hand for pizzas and beer.
But they wanted to depreciate the work at retail rates.
We couldn’t blame them for trying, but we counselled them on the ATO’s expectations and the potential risk.
4. ‘Don’t the same rules apply to residential and commercial properties?’
There is an assumption that the depreciation rules applying to residential properties are identical to those that apply to commercial properties.
They’re not.
First up, the building depreciation rate can be either 2.5% or 4% depending on the type of commercial property and how it is used.
A building used for manufacturing, for example, can be depreciated at 4%. That’s because properties used in that way tend to have a harder life and the wear and tear is greater – depreciation is just compensation for wear and tear.
Short term traveller accommodation can also be depreciated at 4%, but the ATO’s definition for these properties is more restrictive than people think. We have written about this previously here.
Then there are the Assets, or Plant and Equipment as they tend to be referred to in commercial properties..
Some items have shorter Effective Lives in commercial applications because they cop heavier use. And a shorter Effective Life means faster depreciation.
But the biggest difference is that second hand Assets in commercial properties can be depreciated. That is not the case with residential properties courtesy of a rule change in 2017.
And this has helped make commercial properties more attractive to some people – at the very least, it helps with holding costs in the early years.
You can read more on Commercial properties here.
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.
