Depreciation is a key component in maximising the return on your investment property. However, when it comes to self-assessing depreciation, the Australian Taxation Office (ATO) has a clear stance: it is not recommended. The complexities of tax laws, particularly Division 40 for plant and equipment and Division 43 for capital works, make professional assessment crucial.
Under Division 40 of the ITAA 1997, plant and equipment assets, such as air conditioning units and carpets, have specific effective lives and depreciation rates. Similarly, Division 43 deals with capital works, covering the structural elements of a building. The ATO emphasises that these assessments require detailed knowledge of tax legislation and construction costs, which most property owners do not possess.
A common misconception among investors is that self-assessing depreciation can save money. However, the risk of non-compliance and the potential to overlook significant deductions often outweigh any perceived savings. The ATO's position is that professional quantity surveyors are better equipped to ensure compliance and maximise deductions.
To see how this plays out, consider a practical example. Imagine you own a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased for $650,000. By opting for a professional depreciation schedule, you might uncover deductions of around $10,000 in the first year alone. At a 37% marginal tax rate, this could reduce your tax liability by $3,700. Attempting to self-assess could easily lead to missed deductions or errors, reducing your overall financial benefit.
In our experience reviewing thousands of properties across Australia, we've seen several patterns. Investors often underestimate the complexity of depreciation, leading to missed opportunities. Many also fail to update their schedules after renovations, losing out on potential deductions. Furthermore, relying on outdated or incorrect asset lives can trigger ATO audits, resulting in penalties. Another common oversight is misunderstanding the 2017 budget changes regarding second-hand properties, which can significantly impact claims.
The answer can differ depending on your situation. For instance, if you acquired a second-hand residential property after 9 May 2017, you cannot claim Division 40 depreciation on previously used plant and equipment. However, you can still claim Division 43 deductions for the building's structural elements. Properties held in a Self-Managed Super Fund (SMSF) or owned by companies have different implications and require careful consideration. Additionally, commercial properties and properties with mixed-use (residential and business) have unique depreciation rules.
Given these complexities, professional advice is invaluable. A Chartered Quantity Surveyor can provide a detailed depreciation schedule that ensures compliance and maximises your deductions. Working alongside your accountant, they can tailor strategies to your specific circumstances, ensuring you receive the best possible tax outcome.
To make the most of your investment property, consider these steps: