As the end of the financial year (EOFY) approaches, investment property owners have a unique opportunity to optimise their tax positions. Understanding what steps to take can significantly impact your financial outcome.
Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment, while Division 43 allows deductions for capital works on the building structure. Many investors overlook these deductions, particularly for recently acquired properties where changes in legislation may affect their claims. For instance, post-9 May 2017, investors of second-hand residential properties can no longer claim deductions for previously used plant and equipment unless they were the pre-existing owner of the asset.
To see how this plays out, consider a 2010-built 3-bedroom house in Melbourne purchased for $750,000. By obtaining a comprehensive tax depreciation schedule, you identify eligible deductions, including $8,000 for plant and equipment and $5,000 for capital works in the first year. At a 37% marginal tax rate, this reduces your tax bill by $4,810.
In our experience reviewing thousands of properties across Australia, we find investors often miss claiming eligible depreciation on outdoor structures like pergolas or miss updating their depreciation schedule after renovations. Many also fail to consult with a Quantity Surveyor, relying solely on their accountant, which can lead to under-claiming.
The answer can differ depending on your situation. For properties purchased after 9 May 2017, new plant and equipment can be depreciated, but second-hand assets cannot. Pre-1987 buildings generally aren't eligible for capital works deductions unless significant renovations have been done. Properties held within an SMSF or by a company can have different tax implications compared to those held personally.
It's crucial to get professional advice tailored to your circumstances. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, while your accountant ensures it integrates with your broader tax strategy.