Claiming Cash and Non-Cash Deductions On Your Tax Return

In Australia, owning an investment property allows you to claim various deductions on your tax return to offset your taxable income. These deductions can be broadly categorized into cash (immediate) and non-cash (depreciation) deductions.

(This is not tax advice and only general in nature. Please always consult a tax professional)

Cash Deductions

  1. Interest on Loan: Interest paid on the mortgage for the investment property.
  2. Property Management Fees: Fees paid to a property manager or real estate agent.
  3. Maintenance and Repairs: Costs for repairs and maintenance to keep the property in good condition (not improvements, which are capital works).
  4. Council Rates: Local government rates and levies.
  5. Water Charges: Water supply and usage charges, if not paid by the tenant.
  6. Insurance: Premiums for building, contents, and landlord insurance.
  7. Advertising Costs: Expenses for advertising to find new tenants.
  8. Legal Expenses: Costs associated with evicting a non-paying tenant or legal advice concerning the rental activities.
  9. Body Corporate Fees: Fees for shared property expenses in strata-titled properties.
  10. Cleaning: Costs for cleaning the property.
  11. Pest Control: Expenses for pest control treatments.
  12. Gardening and Lawn Mowing: Costs for maintaining outdoor areas.
  13. Stationery and Phone Expenses: Costs associated with managing the rental property.

Non-Cash Deductions (Depreciation)

  1. Depreciation on Plant and Equipment: Decline in value of assets such as appliances, furniture, and equipment. Depreciation can be claimed over the effective life of the assets.
  2. Capital Works Deduction: Also known as Division 43 deductions, these relate to the construction costs of the building and include renovations. Residential properties built after July 18, 1985, and certain improvements can be depreciated at a rate of 2.5% per year over 40 years.

Other Considerations

  • Capital Gains Tax (CGT): When you sell the property, you may be subject to CGT. Any capital gain should be reported in your tax return, though discounts and exemptions may apply.
  • Apportionment: If the property is only available for rent for part of the year, or only part of the property is rented out, deductions must be apportioned accordingly.

What is a Depreciation Schedule

A depreciation schedule is a detailed report that outlines the depreciation deductions you can claim for investment property over its useful life. Depreciation is the reduction in the value of an asset over time due to wear and tear, and in the context of property investment, it pertains to both the building structure and the assets within it, such as appliances and fittings.

Components of a Depreciation Schedule

A comprehensive depreciation schedule typically includes:

  1. Capital Works Depreciation (Division 43): This relates to the building’s structure and fixed assets, such as walls, floors, roofs, and built-in kitchen cupboards. For residential properties, this can be claimed over 40 years at a rate of 2.5% per year.
  2. Plant and Equipment Depreciation (Division 40): This covers removable fixtures and fittings like air conditioning units, carpets, and hot water systems. Each item has its own effective life and depreciation rate.

How is a Depreciation Schedule Used?

  1. Acquisition: When you acquire an investment property, you can engage a qualified quantity surveyor to prepare a depreciation schedule. This professional will assess the property and itemize all depreciable assets, along with their values and effective lives.
  2. Tax Deductions: The schedule provides a year-by-year breakdown of depreciation deductions. Property investors use this information to claim tax deductions on their annual income tax returns, reducing their taxable income and thus the amount of tax payable.
  3. Maximizing Returns: By claiming depreciation, investors can enhance the cash flow from their investment properties. Even properties that are several years old can still offer significant depreciation benefits.
  4. Compliance: Having a professional depreciation schedule ensures compliance with the Australian Taxation Office (ATO) regulations, as the schedule will accurately reflect the correct deductions and adhere to current tax laws.

Example of Usage

Suppose you purchase an investment property for AUD 500,000, including land and building. A quantity surveyor assesses that the building structure is valued at AUD 300,000, and the plant and equipment items total AUD 50,000.

  • Capital Works Depreciation: You can claim 2.5% of AUD 300,000 annually for up to 40 years, which is AUD 7,500 per year.
  • Plant and Equipment Depreciation: The schedule might indicate varying rates for different items, leading to a higher initial depreciation claim in the first few years.

When you prepare your tax return, you include these depreciation amounts as deductions against your rental income, effectively lowering your taxable income and reducing your tax liability.

Importance

Using a depreciation schedule effectively can provide substantial tax savings, improve the profitability of investment properties, and ensure compliance with tax laws. It’s a critical tool for property investors in Australia to optimize their financial returns.

Professional Advice

Given the complexity of tax laws and potential for changes, it’s advisable to consult with a tax professional or accountant who can provide tailored advice and ensure that you are compliant with the current Australian Taxation Office (ATO) guidelines.



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