How to Maximise Tax Benefits with Depreciation Schedules
Depreciation schedules are essential tools for property investors looking to optimise their tax benefits and increase profitability. By claiming deductions for the wear and tear on their property's structure and assets, investors can reduce their taxable income and improve cash flow.
What is Property Depreciation?
Property depreciation refers to the decline in value of a building and its fixtures due to usage and aging. The Australian Taxation Office (ATO) permits investors to claim this depreciation as a tax deduction, even though it's a non-cash expense. This means you can reduce your taxable income without impacting your cash reserves.
Types of Depreciation Deductions
There are two primary categories of depreciation deductions available to property investors:
Capital Works Deductions (Division 43): These pertain to the building's structure and permanently fixed assets, such as walls, floors, and built-in cupboards. Capital works deductions are typically claimed at a rate of 2.5% per year over 40 years.
Plant and Equipment Depreciation (Division 40): This covers assets that can be easily removed or are mechanical in nature, like appliances, carpets, and blinds. The depreciation rates for these items vary based on their effective life as determined by the ATO.
Maximising Tax Benefits with Depreciation Schedules
To fully leverage depreciation deductions, it's essential to have a comprehensive tax depreciation schedule prepared by a qualified quantity surveyor. This schedule outlines all depreciable items within your property and their respective depreciation rates, ensuring you claim the maximum deductions available.
According to Altus Group, "Property investors are entitled to a range of tax deductions. Of all the deductions available, depreciation is commonly overlooked but typically the second biggest tax deduction after interest. With increased pressure on investors, property tax depreciation deductions could inject much-needed cash flow into your investment."
Additional Tax Deductions for Property Investors
Beyond depreciation, property investors can claim various other tax deductions, including:
Interest Repayments: The interest charged on your rental property's home loan is deductible. However, repayments on the loan's principal are not claimable.
Insurance Premiums: Premiums for landlord insurance and building and contents insurance are fully deductible in the year they're paid.
Property Management Fees: Fees paid to property managers for services like tenant sourcing, inspections, and maintenance coordination are deductible.
Repairs and Maintenance: Costs incurred to repair or maintain the property, such as fixing a broken fence or repainting, can be claimed as immediate deductions.
Council Rates and Land Tax: These ongoing expenses are deductible for the period your property is rented or available for rent.
Engaging a Quantity Surveyor
To ensure you're claiming all eligible deductions, it's advisable to engage a qualified quantity surveyor to prepare a tax depreciation schedule for your property. The cost of obtaining this schedule is also tax-deductible.
Maximising tax benefits through depreciation schedules is a strategic approach to enhance the profitability of your investment property.Understanding the various types of depreciation and other deductions that are available, as well as engaging professionals to assist you, can lead to significant improvements in your cash flow and return on investment.
Remember, tax laws can be complex and subject to change. It's essential to consult with a tax professional or accountant to ensure compliance and to optimise your tax position.