August 2024
This is the time of year, toward the end of August, when we raise our weary heads and ponder the common misconceptions of clients and their accountants over tax season.
It’s always slightly different.
We’ve been doing this for a long time, over 20 years, and our clients know they can get in touch with us and ask questions.
There seems to have been a run on Special Levies this year. Probably due to lagging building fixes after the terrible weather of 2022. People think all Special Levies imposed for things like leaking roofs can be claimed as ‘repairs’. Nah.
We have also had a run of clients not understanding why they can’t claim depreciation on the second hand Assets in their properties. It’s a case of us having to explain when ‘new’ is not necessarily ‘new’.
The ATO stand on ‘Initial Repairs’ confuses and ultimately disappoints many people. Understandably, people think repairs done to a property in preparation for tenants can be expensed.
Earlier this year we had some clients who had been sold properties in a resort on the ski fields and were assured they would be classified as Short Term Traveller Accommodation and thereby eligible to claim the Capital Works deduction at 4%.
And always in the top 5 is the assumption that older properties can’t be depreciated.
Misconception 1: Special Levies can be claimed as ‘repairs’
The weather over the last couple of years has tested buildings. And many have failed that test. Taking shortcuts with waterproofing seems to be a dopey thing to do given those short cuts will always be exposed eventually.
Roofs and windows failed at an alarming rate in poor weather a couple of years ago, but only now are some of the fixes being carried out and many are funded through the dreaded Special Levy – what a disappointing notification that is from the building manager.
That disappointment is compounded when some people realise that rather than being able to claim immediately for that repair work, they will need to claim it at 2.5% over 40 years.
We have written previously here about Special Levies.
In short, what determines the way they are claimed by an individual depends on the nature of the work being funded and the timing.
Fixing a leaking roof or dealing with failed flashing around windows is very much in repair territory i.e. immediately claimable. Not so fast, though.
If the problem existed before YOU started to rent out the property, you can’t expense it. You will need to claim it over 40 years bit by bit. The reason for that is you are making the property better than it was when you started to rent it out.
The ATO are very much on the lookout for people claiming Special Levies incorrectly.
Misconception 2: Depreciation can be claimed on second hand Assets
When is a new stove not new? Sounds like a riddle, doesn’t it?
You’ll recall that some years ago, Treasury decided that people should not be able to claim depreciation on second hand Assets. We have written about this here previously.
So if you buy, say, a ten year old house, you can’t claim depreciation on the Assets in the house, things like appliances, hot water, floor coverings etc. The reason for that is that a previous owner might have already depreciated those items, so Treasury were not keen on subsequent owners depreciating the same items.
But what if you are the first owner of the property? Let’s say you buy a brand new house, or build one, and you have to live there for 6 months because you were in receipt of a grant.
When you move out of that property, the Assets are deemed second hand and you can’t depreciate them. The government gives with one hand, and takes with the other. All is not lost, though, your accountant might be able to claim that deferred depreciation when you sell the property.
Misconception 3: Depreciation can be claimed on Initial Repairs
Here’s another riddle: when are repairs not repairs? When they are Initial Repairs.
An Initial Repair is something you do to a property to prepare it to rent out. Or something you need to fix very soon after it was rented out – a problem that already existed and was perhaps discovered by the tenant a few weeks down the track.
We have written often about repairs, most recently here, but let’s ponder the logic behind it.
To claim a repair, the damage must have been caused while you were renting out the property. If this was not the case, there would be nothing stopping someone from renting out their home and after 6 months or so doing all those repairs they have been putting off for years.
Or better still, buying a rundown property to rent out and spending tens of thousands of dollars getting that property up to spec and then claiming those costs as an immediate deduction. If those things were possible, there could be a whole seminar series written around them.
Misconception 4: A short-stay rental property can be depreciated at 4%
The 4% building write-off for Short Term Traveller Accommodation is very attractive. It’s sort of the Holy Grail of Capital Works deductions and worth chasing. But like the Holy Grail, it’s a bit elusive.
There are many tales about the 4% write-off, including the one told to a number of people earlier this year by people marketing properties in the ski fields.
These people were assured by the agent marketing the properties that because people never stayed in them longer than a couple of weeks, they qualified as Short Term Traveller Accommodation and were eligible for the 4%.
We had to burst a few bubbles this tax season when some of those buyers asked us to do their Depreciation Schedules. These properties did not qualify for the elusive 4% write-off.
That’s because to determine eligibility for the 4% Short Term Traveller Accommodation, the usage pattern of a property is less relevant than the nature of the property itself. In the case of those beautiful properties on the ski fields, the only reason people only stayed in them for a short time was that they were so staggeringly expensive. People could live in these properties full time (if they could afford it!) – that’s why they don’t qualify as Short Term Traveller Accommodation.
So what properties would qualify as ones for Short Term Travellers? A hostel with dorms and shared facilities. A motel room. Possibly a boarding house with shared facilities. Not much else.
Misconception 5: There’s no depreciation to claim in older properties
The possible depreciation in older properties is always in the top 5 questions.
It’s often asked by someone with an older property who has always been sure their property does not qualify and is sort of hoping we are in agreement. Clearly, there is some niggling doubt.
And we often confirm that doubt. Any residential property built after September 1987 can be depreciated.
Now, a modest property built back then might not have cost much to build and might therefore not have much depreciation in it, but the depreciation could easily be $1,500 – 2,000 per year. That’s worth claiming.
And if that old property has had any renos in the last 35 years, you get to claim them – even if you didn’t do them. Renos on properties of any age, for that matter, can be depreciated by the current owner. You can read more on this here.
It’s best to check. Clients call us every single day unsure of whether there is any depreciation to claim in their property. In a short phone call, we can tell them what depreciation might be there and how we can help them get their hands on it.
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.
