When you're investing in a new build property, the anticipation of benefiting from tax depreciation can be enticing. However, it's critical to understand that depreciation claims cannot commence until you have legal ownership and the property is available for rent. Until settlement occurs, you are not entitled to any depreciation benefits.
Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment assets like carpets and appliances, while Division 43 allows you to claim on the building structure itself. However, both divisions stipulate that you must own the property and it must be available for rental to start claiming depreciation.
A common misconception is that signing a contract equates to ownership. Until settlement, you have no legal title and therefore, cannot claim any depreciation. This means that even if construction is complete and tenants are lined up, you must wait until settlement is finalised.
To see how this plays out, consider a practical example. Imagine you purchase a new build 3-bedroom townhouse in Melbourne for $800,000. Settlement is scheduled for March 2024. Upon settling, you place the property on the rental market immediately. In this scenario, you can start claiming depreciation from the day the property becomes available for rent. Let's say you have $50,000 worth of plant and equipment and $200,000 in capital works. In your first year, you might claim around $10,000 in depreciation, reducing your tax bill by $3,700 at a 37% marginal tax rate.
In our experience reviewing thousands of properties across Australia, many investors are eager to claim benefits early, often misunderstanding when they can legally begin. Another frequent oversight is failing to account for all eligible items in a depreciation schedule, which can significantly impact potential deductions. Additionally, investors sometimes overlook the importance of having a qualified Quantity Surveyor prepare their depreciation report, which ensures accuracy and compliance with ATO guidelines.
The answer can differ depending on your situation. For instance, if you're purchasing a new build for personal use, depreciation claims won't apply until you decide to rent it out. If the property is under a company name, different tax implications and depreciation rates may apply. For properties under construction that won't settle until after the 2017 budget changes, remember that second-hand plant and equipment rules might affect future claims. Also, be mindful of any delays in construction or settlement as these can impact when you can commence claims.
Given the complexities and specific rules surrounding depreciation claims, consulting with a Chartered Quantity Surveyor and your accountant can provide clarity and ensure you're maximising potential deductions. They can guide you through the specifics of your situation, ensuring all eligible claims are made without breaching ATO regulations.