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23 Apr 24
If your body corporate lot is an investment property – you are likely eligible to claim depreciation tax deductions each year.
This article was contributed by Zac Gleeson, Managing Director of Gleeson Quantity Surveying (registered tax agent).
BCsystems is not a registered tax agent and does not give income tax advice to our clients. Any tax-related enquiries should be directed to Gleeson Quantity Surveyors or to your own registered tax agent.
With the end of another financial year only around the corner, now is the perfect time to review your income property-related tax position to make sure you are not missing out on available deductions.
There are many misconceptions about the property depreciation tax deductions available to strata properties, so let’s run through some frequently asked questions:
What is tax depreciation?
The Australian Taxation Office (ATO) allows investment property owners to claim a tax deduction on the wear and tear (depreciation) on an investment property and its fittings. You don’t necessarily have to directly incur the expense to be able to claim the deduction, you can inherit deductions upon acquisition of the property*.
Tax depreciation is split into two categories:
- Division 43 Capital Works Allowances (the building itself) and
- Division 40 Plant and Equipment (eg. carpets, blinds, A/C, ceiling fans etc.)
*different rules apply for residential properties purchased post 9 May 2017, contact GQS for more information.
How does this work in strata or body corporate properties?
Lot owners in a strata property typically own the Plant and Equipment servicing their individual lot (e.g. carpets, blinds, air-conditioners, ceiling fans). Investor-owners are generally entitled to a tax deduction for the depreciation or decline in value for their own lot.
Lot owners also own a portion of the common property, and may be entitled to claim their share of the depreciation of the building and the common areas. This will depend on the age and nature of the strata property. The proportion of the property which you are entitled to claim will be determined based on your interest schedule lot entitlements.
Is my property too old to depreciate?
Depreciation tax deductions are available to residential property Investors whose investment property was built after 15 September 1987, and any refurbishments/renovations/improvements from 27 February 1992. Different rules apply to commercial properties.
You do not have to know when these works were done – leave this up to your tax depreciation provider. Depreciation on plant and equipment is also available on all new buildings and all existing properties when purchased prior to 10 May 2017. In summary, nearly all investment properties will be entitled to some form of depreciation deduction.
I have held my property for years, so there’s no point claiming depreciation now?
The building structure has an effective life of 40 years. If your investment property was built after September 1987 then it is likely you are entitled to claim tax deductions.
It is possible to amend past income tax returns (up to 2 years) to add deductions to prior years if you were entitled to those deductions in the past – you should seek your own tax advice from a registered tax agent.
My accountant calculates my deduction entitlements?
Quantity surveyors are recognised by the Australian Taxation Office (ATO) as the most suitably qualified profession to estimate the depreciable decline in value of property.
In accordance with ATO Tax Ruling 97/25 , if your residential investment property, for example, was constructed after September 1987 and/or construction costs are unknown, you must engage a registered and qualified quantity surveyor to produce a depreciation schedule.
Your accountant’s role is to take the information supplied by the Quantity Surveyor and incorporate this into your income tax assessment.
PS – The cost of the quantity surveyor’s report is also 100% tax deductible.
Renovations were completed by the previous owner – can I claim?
It does not matter if the works were undertaken by a previous owner, when you purchase an investment property you inherit the entitlement to claim the remaining depreciation on all of the property’s improvements.
Quantity surveyors use a trained eye when inspecting the property, draw upon extensive construction knowledge, utilise historic council records and building searches and use historical photos of the property as the basis for depreciation calculations.
The most common renovations which create an entitlement to claim tax deductions include:
- Bathroom – estimated value $25,000
- Kitchen – estimated value $30,000
- Flooring & wall tiles – estimated value $10,000
What if I am considering a renovation?
If you are about to renovate your investment property it may be worth getting a quantity surveyor to undertake a pre-renovation inspection. This inspection is to identify what assets or capital works you are going to demolish or replace.
You are entitled to assign a value to these improvements and write them off as an immediate tax deduction. A pre-renovation or ‘scrapping report’ can assist you to claim the value left in the improvements as a tax deduction, and immediately offset some renovation costs.
Tax depreciation isn’t worth it due to capital gains tax
A common myth regarding tax depreciation is that capital gains tax (CGT) which occurs at the disposal (sale) of your investment property, negates the savings made through claiming depreciation.
For investors who own the property for 1 year or more – this is generally not true thanks to a 50% CGT discount. Most investors will hold their investment property for more than 1 year, and in most cases the advantage gained by claiming depreciation tax deductions each year significantly outweighs the increase in CGT liability.
BCsystems client offer: Gleeson Quantity Surveyors (GQS) offers a 10% discount off the cost of depreciation report services to BCsystems clients. Use the discount code ‘bcsystems’ to order a depreciation schedule from GQS online or mention BCsystems when you call.
Please note – GQS is a local business which supplies quantity surveying services to our clients. BCsystems has arranged this advice as an added service for our clients, we do not receive any benefit if our clients choose to engage GQS.
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