When a property is jointly owned, the allocation of depreciation claims can become a nuanced process. The key is to ensure that each owner claims their rightful share of depreciation based on their legal interest in the property. This approach aligns with the Australian Taxation Office's guidelines under Division 40 and Division 43 of ITAA 1997.
In essence, each co-owner of a property must claim depreciation deductions in proportion to their ownership interest. This means if you own 50% of a property, you can claim 50% of the property's depreciation deductions. The most common misconception here is that all joint owners can equally split the depreciation regardless of their actual ownership percentage, which is incorrect and can lead to compliance issues with the ATO.
To see how this plays out, consider a practical example. Imagine a 2015-built 3-bedroom house in Bondi, Sydney, purchased for $1.2 million. The property is equally owned by two investors, each holding a 50% share. The total available depreciation for the first year, combining Division 40 plant and equipment and Division 43 capital works, is $15,000. Each owner can claim $7,500 as their depreciation deduction. At a 37% marginal tax rate, this results in a tax saving of $2,775 per owner for that year.
In our experience reviewing thousands of properties across Australia, we often see investors failing to adjust depreciation claims when ownership percentages change, such as when one owner buys out another's share. Another common oversight is not updating the ownership structure in their tax records after refinancing, which can alter the ownership stakes. Additionally, co-owners sometimes neglect to coordinate their claims, resulting in double claims or missed opportunities.
The answer can differ depending on your situation. For instance, if the property was acquired after 7:30pm AEST on 9 May 2017, and it is a second-hand residential property, the ability to claim Division 40 depreciation on previously used plant and equipment is restricted. However, Division 43 capital works deductions remain unaffected. Similarly, properties held within a Self-Managed Super Fund (SMSF) or with different ownership structures such as tenants in common versus joint tenants may have unique implications on how depreciation is calculated and claimed.
Given the complexity involved and the potential for errors, it's advisable to consult both a Chartered Quantity Surveyor and an accountant. A Quantity Surveyor can provide a detailed depreciation schedule that accurately reflects each owner's entitlement, while an accountant ensures that these figures are correctly integrated into the tax return, considering any changes in ownership structure or tax legislation.