The Australian Taxation Office (ATO) has a keen interest in property investors, primarily to ensure compliance with tax obligations. As the property market in Australia continues to be a major investment avenue, the ATO's scrutiny helps to ensure that investors are correctly reporting income, claiming deductions, and understanding their capital gains tax (CGT) responsibilities.
Under Division 40 of ITAA 1997, the ATO monitors the depreciation claims on plant and equipment, particularly following the 2017 budget changes. Investors who acquired second-hand residential properties after 7:30pm AEST on 9 May 2017 can no longer claim depreciation on previously used plant and equipment unless they are grandfathered under the old rules. Additionally, under Division 43, capital works deductions are another focal point, requiring accurate record-keeping and substantiation.
To see how this plays out, consider a 2015-built 3-bedroom house in Melbourne purchased for $900,000. The investor can claim capital works deductions under Division 43 at 2.5% per annum, amounting to $22,500 over ten years. However, for plant and equipment, only new assets acquired after 2017 would be eligible for depreciation claims. Assuming a new air conditioning unit was installed for $3,000, the investor could potentially claim a deduction over 10-15 years, reducing their taxable income.
In our experience reviewing thousands of properties across Australia, we see investors often overlook the importance of substantiating their claims. Many fail to keep adequate records of expenses or incorrectly classify capital improvements versus repairs. Another common oversight is misunderstanding the implications of the 2017 budget changes, leading to incorrect depreciation claims on second-hand properties.
The answer can differ depending on your situation. For instance, if you acquired property before the 2017 changes, your depreciation claims might be grandfathered. Commercial properties have different depreciation rules, and SMSF-owned properties have unique compliance requirements. Additionally, joint ownership can affect how deductions are claimed, and partial-year ownership requires prorated calculations.
Given these complexities, engaging a Chartered Quantity Surveyor and an accountant is crucial to navigate the intricacies of property investment taxation. They can ensure your claims are compliant and optimised, considering individual circumstances and legislative updates.