What is Tax Depreciation?

Firstly, lets take a closer look at tax depreciation via the role of a quantity surveyor…

Quantity surveyors are recognised by the Australian Taxation office as qualified to assess and report construction costing and the depreciation of a building and its fixtures.

Maximising a depreciation claim requires a thorough understanding of the Income Tax Assessment Act, applicable income tax rulings, Case Law and specialist construction costing skills.

Engaging a quantity surveyor ensures you are minimising risk and claiming the maximum amount of deductions available.

In preparing a professional capital allowance and tax depreciation report a qualified and highly experienced quantity surveyor uses information provided by you (the client)…

Quantity surveyor uses their own expertise in estimating construction costing, and a detailed inspection of the property to identify every claimable item.

Extensive knowledge of relevant tax legislation and years of experience interpreting such legislation means always reporting the maximum depreciation available to ensure the investor claims every dollar to which they are entitled.

Qualifications of Quantity Surveyors:

  • Degree qualified with a Bachelor of construction management as a minimum
  • Members of the Australian Institute of Quantity Surveyors
  • Extensive experience inspecting, assessing, researching and calculating depreciable deductions
  • Are available to you and your advisers for ongoing advice and assistance…

Can your own accountant estimate construction costs for tax depreciation purposes?
Accountants can apply actual costs, but are not qualified to estimate construction costs.

Tax Ruling 97/25 of the Income Tax Assessment Act (1997) specifically states that “valuers, real estate agents, accountants and solicitors generally do not have relevant qualifications or experience to make such an estimate.”

In order to maximise your depreciation claim you need to have a report prepared by an appropriately qualified professional quantity surveyor.

How much can you expect to pay for a tax depreciation report? You could expect to pay anywhere between $600 and $1,000 for a tax depreciation report for a standard residential property in either metropolitan or regional areas, depending on who you speak to.

Some companies offer tax depreciation reports in the $300 to $500 range; however you need to be careful and make sure that:

  • Their staff have the relevant qualifications and experience
  • Qualified quantity surveyor will conduct a full inspection
  • You won’t get hit with any extra fees for council searches or for including renovation costs in the report
  • Quantity surveyor knows how to fully maximise your capital allowance and tax depreciation entitlements…

What should you look for in a quantity surveyor? First and foremost, your quantity surveyor should conduct a full inspection of the property and ideally 5 years experience in preparing capital allowance and tax depreciation reports which are tailored specifically to the property investor’s financial situation.

A tax depreciation report is not just a table of costs and dates; it is a complete schedule which requires the utmost attention to detail both in the office and on site.

Your quantity surveyor should be able to provide over phone estimates of potential claims you could expect to make as property investor and follow through with an accurate report.

Your quantity surveyor should be available for consultation to you and/or your accountant as often as required either before, during or after the report is complete.

The quantity surveyor should also be responsible for arranging access to the property and should bear costs of any travel expenses or council/authority searches which may be required to fulfil their service promise to you.

Finally, your quantity surveyor should also have the integrity to advise you not to proceed with the tax depreciation report if they feel the exercise will not stack up in your favour.

What should you look for in a tax depreciation report? 

A tax depreciation report is much more than just a table of costs.

In order to fully maximise your claim and to save your accountant time (which saves you money) you need to ensure your quantity surveyor provides the following:

  • Summary of property information
  • Methodology explaining how the report was compiled
  • Detailed list of plant and equipment assets
  • Schedules for diminishing value method
  • Schedules for low cost and low value pooling
  • Schedules for prime cost method
  • Nominated effective lives for every each plant and equipment asset
  • Nominated depreciation rate applicable for each plant and equipment asset
  • A table of division 43 building works, including any renovations by the investor
  • 40 year projection covering you for the life of the building

Won’t any quantity surveyor be able to provide a report with all the features listed above?
Unfortunately, no because some quantity surveyor firms like to cut down on the resources required to produce a tax depreciation report.

They may not conduct an inspection of premises which means they can’t put an accurate value on plant items, or they may not spend the time needed to provide the full service as outlined above.

This often results in a cheaper (inferior product) and although the report may save you $200 on fees, it could end up costing you thousands in overlooked tax deductions. Only a handful of companies provide a fully rounded service as detailed above.

Why is it important to have a quantity surveyor inspect the property? Wouldn’t it be cheaper for me to do a self assessment?

Quantity surveyors are specifically trained to accurately measure and assess rental properties to extract the highest tax depreciation claim available to the investor.

They know exactly what they are looking for as soon as they arrive on site. Every tiny little detail in the property is assessed including things like door closers, smoke alarms and even shower curtains.

The quantity surveyor will also note the brand, model and size of all of the big ticket items such as kitchen appliances, air conditioners and hot water systems.

Every square mm in the house is measured to ensure nothing is missed. Without a full quantity surveyor inspection you run the risk of missing thousands of dollars in missed tax deductions.

What information will you need to provide my quantity surveyor?

Once you’re satisfied your quantity surveyor provides a premium service all you need to do is provide:

  1. Full name, address, contact numbers and email address
  2. Your accountants name
  3. Rental property address
  4. Property manager details
  5. Purchase price, settlement date and renovation details (if applicable)

Other than that your quantity surveyor should be able to follow up on council searches to find out the age of the building, land value and any other relevant details to streamline the process for you.

My property has tenants living in it, will this be a problem? If your quantity surveyor  is committed to looking after your property investment, and this extends to being flexible with your tenants so they are not put out or upset by our visit.

A professional quantity surveyor sets this up with your property manager and your tenant to find a time which is suitable to do a full and thorough inspection of the property.

How long does the whole process usually take? Depending on availability of your tenants, usually gain access within a week of you giving instruction to proceed. On average the turnaround from inspection is approx 5-9 business days.

My property has been subject to pre and post-purchase renovations. Will this be factored into the inspection and preparation of the report? Definitely. It’s all about maximising your tax deductions and putting as much money as we can back in your pocket.

You will be asked at the enquiry stage if you have added any improvements, which is also included in the report at no extra cost. The inspection and historical records search is done in an attempt to uncover any works previous owners may have carried out .

If quantity surveyor finds the right evidence, their expertise allows them to estimate a value which can be included in your tax assessment.

What if you lived in the property for a number of years before renting it out; will there be any tax depreciation left? It would depend on how long ago you bought property, but in most cases yes.

The goal is to maximise tax depreciation deductions immediately upon purchase of the property. However, as you are unable to claim tax depreciation for the period you were living there…

Quantity surveyor re-structures report (within ATO guidelines) to minimise depreciation claimed for the period you occupied building and maximise depreciation in the period it was leased, or available for lease.

What happens once the report is complete? The invoice is settled and a soft copy will be emailed to you and your accountant.

The best part about reports is they provide a complete summary of claims for your accountant to include in your tax assessment.

This saves your accountant time, which in turn saves you money over and above the tax savings represented in the report.

Ask your quantity surveyor to work with your accountant at all times either before, during or after the report is complete.

How does having a tax depreciation report affect capital gains tax or CGT?

What if you don’t claim the division 43 capital works allowance, because you’re afraid it would reduce your cost base and therefore increase their capital gains tax liability if/when they sell the property.

There are a couple of steps you can do as a property investor:

  • If you own the investment for more than 12 months, you are eligible for a 50% discount on your CGT liability
  • Claiming full depreciation benefits of an investment from the beginning gives you opportunity to use additional cash flow
  • Perhaps you can reinvest
  • Pay down liabilities etc…as opposed to realising a potential saving in your CGT liability at some time in the future, if/when you dispose of the property

Remember, a dollar in your pocket today is more valuable (holds more purchasing power), than a dollar sometime in the future. Therefore it makes sense to claim every deduction available to you as early as possible.

When you do any work on your investment property i.e. refurbishment, renovations, when is it repairs and maintenance, when does it need to be depreciated? This can sometimes be a little bit of a grey area, and you need to make sure you are not claiming improvements as repairs, and vice versa.

Generally speaking, a repair is something which restores an asset back to its original condition.

For example: if you bought a brand new investment property, and the tenants scratched some paint off the walls while moving furniture, when you paint that wall you are repairing or restoring it back to the condition it was in when you first bought it.

This would be considered a repair, which you could write off immediately. However, if you bought an existing property and decided to paint walls in an effort to improve condition of building from when you first purchased, this would be considered a capital improvement which you would write off annually at 2.5% per annum (for a residential property).

Under what circumstances would you need to have a tax depreciation report re-done?
Usually a tax depreciation reports lasts for the life-time of the building, assuming it remains in the condition it was in when initial inspection is completed.

If you do minor improvements over the years such as a new hot water heater or you added swimming pool or garage, simply take your receipts along to your accountant and he/she will include them in your yearly tax assessments.

Only time you would need a second report was if you carried out substantial renovations or refurbishments from the time original tax depreciation report was compiled.

Tax Depreciation