Improving Return on Investment

Ensure your investors are aware of all of the property items that can be claimed in legitimate tax deductions, says Paul Bennion of Deppro.

The role of property managers is multi-faceted and considerably more complicated than just rent collecting. A manager’s main focus is to assist property owners to improve the return on their investment, and an emerging part of this role is raising the awareness levels among investors about the full potential of property depreciation and the positive impact it can have on increasing tax returns.

Given the time of year, most eyes are now firmly focused on strategies to maximise taxation refunds, and none more so than those of investors.

The reality is that there remains considerable scope for more to be claimed in legitimate tax deductions by investment owners. Many underestimate the number of items that can be depreciated for tax purposes; DEPPRO estimates indicate that the potential value of such unclaimed deductions could run into millions. Increasing numbers of property managers are becoming pro-active in ensuring investors are acquainted with tax depreciation opportunities.

There is no doubt that investors are increasingly turning to depreciation specialists to ensure the compliance of their taxation claims. Evidence suggests that a proportion of these are doing so on the advice of their property managers. Investors are becoming more aware of the breadth of legitimate deductible items they are entitled to claim, and the inclusion of all suitable items in their taxation submissions is resulting in significant increases in their tax refunds.

The scope of items that are allowed as deductions is as broad as it is diverse. This is possibly the reason why many deductions are overlooked. Examples of permissible, yet often neglected, deductions include the pumps attached to spa baths and freestanding spa baths. Similarly water tanks, built in coffee machines, unpretentious garden gnomes and children’s cubby houses qualify as valid deductions. Further, apartment owners are generally unaware that common areas such as car parking and recreational facilities may also be eligible for inclusion in taxation returns.

For those who have invested in older dwellings, there is significant concealed depreciation value in extensions and renovations. For example, a six-decades-old semi house in Sydney had an extension added twenty years ago. This increased the value of its depreciation by $20,000, which was a very pleasant surprise for its owner.

It is important for managers to highlight that depreciation is a specialised area of taxation, and is the domain of qualified quantity surveyors who have the expertise and knowledge to understand which items are depreciable and how savings can be made. They also have the authority to compile fully-compliant Australian Taxation Office (ATO) depreciation reports.

A tax depreciation report can identify hundreds of items in an investment property with legitimate depreciation value. Owners of investment properties claiming tax deductions on items with depreciation entitlement in their rental property can reduce the tax payable thereby boosting cash flow.

Property managers liaise with investors about a range of issues. One should be tax depreciation. The issues raised above provide a context within which this important topic may be addressed.

The following facts would also be beneficial when informing investors of the considerable potential of property depreciation.

  • The best time to consider tax depreciation is on property settlement. The reason for this is that all plant and equipment is given a new lease of life from that date.
  • An investment building is eligible for a 40-year depreciation based on the actual or historic construction cost. This applies to buildings constructed after 1985, but extensions and alterations to older buildings are themselves eligible for 40-year depreciation. This means 2.5 per cent of the original construction cost of the new additions.
  • New kitchens, bathrooms, garages, carports, patios and barbeque areas added to older properties after 1985 are depreciable.
  • Swimming pools constructed after February 1992 are eligible for depreciation as structural improvements.
  • A Tax Depreciation Schedule is only required once during an investor’s ownership of an investment property.

In conclusion, while detailed knowledge of tax depreciation is the province of qualified quantity surveyors, progressive property managers can contribute to boosting investors’ tax refunds by ensuring they are alerted to its potential.

Paul Bennion is Managing Director of DEPPRO, a national property depreciation company. For more information visit www.deppro.com.au.

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