Tax depreciation on a residential or commercial investment property is a deduction against assessable income allowing the owner to reduce the amount of tax payable. The deduction is based on the depreciating value of the property asset. If you acquire property for income, you are entitled to depreciate the building and the cost of the building– against your available income. It is a legitimate deduction against assessable taxable income and can be offset by total taxable income to mitigate taxable burden. It allows investors to deduct original costs of plant and equipment from the total tax obligation. It happens in two ways
Capital works deduction
Also known as building write-off, this refers to the tax deduction available for the structural elements of a building including fixed irremovable assets. Sadly, thousands even millions remain unclaimed by investors because of ignorance of this provision. Procuring the services of a qualified quantity surveyor to assess the property and give a summary to your accountant for when you’re filing returns is important.
Plant and equipment
Easily removable or mechanical and sometimes mobile. Plant and equipment assets are identified as assets with a limited effective period, and productivity or return from them is expected to decline in value or depreciate over time. Plant and equipment depreciation is calculated by their practical life. These effective life periods are set by the commissioner of domestic taxes. He updates them regularly in tax rulings and gazettes them.
A quantity surveyor should prepare a depreciation schedule. Depreciation ensures cash return from investment property is maximized year in year out. The gains of depreciation are not standard and will vary according to the type of building, age, what it’s used for, and the fittings and trimmings in it are all documented in the depreciation schedule. Properties can all claim depreciation based on the diminishing value or prime cost methods of depreciation.
No building is too old to claim for depreciation. The year it was constructed determines if you can apply for both building allowance and Plant and Equipment.
Commercial and industrial properties are subject to varying cut off dates by which they can claim depreciation. It is only quantity Surveyors who are suitably qualified to make a tax depreciation schedule if the costs are uncertain.
To ensure that a depreciation claim is maximized, a combination of construction costing skills and thorough knowledge of current tax depreciation and capital works deductions legislation is required. If you have done renovations, you need to outline how much you spent on improvements as an obligation of the law. Even if it is the previous owner who completed the renovations depreciation can still be claimed, and you as the new owner are eligible for the deduction. Similarly, a quantity surveyor can be consulted for the case where the cost of renovations is unknown.
In summation, it is in your best interests, and it is recommended that you consult a specialist Quantity Surveyor to prepare a depreciation schedule before lodging their tax return.