Backdating a depreciation schedule can be a viable option for investors who have not claimed depreciation on their properties in previous years. This can help you recover missed deductions and potentially enhance your cash flow by adjusting past tax returns.
How Backdating a Depreciation Schedule Works
In Australia, the ATO allows property investors to amend previous tax returns to include missed depreciation deductions. This process involves preparing a depreciation schedule that outlines eligible deductions for plant and equipment (Division 40) and capital works (Division 43) from the time you acquired the property. The schedule is then used to amend past tax returns, typically for up to two previous years, although the ATO has discretion to allow further amendments under certain circumstances.
A common misconception is that backdating means fabricating numbers or manipulating dates. In reality, it involves accurately calculating what could have been claimed had the schedule been in place from the start. This requires detailed records and professional expertise to ensure compliance with ATO standards.
How This Works in Practice
Consider a scenario where you purchased a 2015-built 3-bedroom townhouse in Richmond, Melbourne for $850,000. You realised in 2023 that you had not been claiming any depreciation. With a backdated depreciation schedule, you could identify missed deductions, say $10,000 per annum for plant and equipment and capital works combined. By amending your 2021 and 2022 tax returns, and assuming a 37% tax bracket, you could potentially recover $7,400 in tax refunds over those two years.
Professional Insight
In our experience, many investors are unaware they can backdate depreciation schedules. One thing we frequently see is investors missing out on substantial tax savings simply because they didn't know about this option. What most investors don't realise is that even if you inherited an investment property, backdating is still possible, provided you have appropriate records. Another common oversight is not consulting a Chartered Quantity Surveyor, which can lead to inaccurate schedules and ATO scrutiny.
When Does the Answer Change?
- Post-9 May 2017 Acquisitions: If you acquired a second-hand residential property after this date, you cannot claim Division 40 deductions on previously used plant and equipment.
- Pre-1987 Buildings: Properties built prior to 16 September 1987 are generally not eligible for Division 43 deductions.
- Commercial Properties: Different rules apply, particularly with plant and equipment, where more flexibility often exists.
- Partial Year Ownership: If you owned the property for only part of the year, your deductions would be pro-rated.
When Should You Seek Professional Advice?
Backdating depreciation schedules involves complex tax and accounting principles. You should seek advice from a Chartered Quantity Surveyor to ensure your schedule is accurate and compliant. Additionally, your accountant can guide you through the process of amending past returns and advise on the tax implications specific to your situation.