Property tax allowances - increasing the return on residential property investments
May 2001
 Property tax allowances
are a valuable aspect of any property investment due to their ability to enhance an
investor's return and produce a better cashflow. However, a high level of expertise
is required to ensure that investors obtain maximum allowable entitlements.
What are property tax allowances?
Property tax allowances form part of the Income Tax
Assessment Act 1997 (hereafter called 'the Act') and provide an opportunity for owners of
income producing property to reduce their assessable income. There are a number of
property tax allowances available to property owners, investors, and developers, including
allowances for building structure and depreciation on plant items. Property tax allowances
are often simply referred to as property depreciation.
Can property tax allowances
increase my investment return?
Property tax allowances can reduce an investor's
assessable income, and by correctly claiming and maximising these deductions, investors
can significantly enhance the after tax return from their investment and generate a
healthier cashflow.
What allowances are available for
my investment?
Depreciation Allowances
(Division 42 ITAA 1997)
Depreciation allowances are available to owners of plant in both new and second-hand
properties that produce assessable income. There is no definition of plant under the
Act. However, attached to Income Tax Ruling 2000/18 there are over 850 items of
plant that may be depreciable including carpets, air conditioning and light fittings.
Depending on the property's specifications, furnishings and sale contract conditions,
owners may be eligible to claim between 10% - 20% of the building's value as depreciable
plant.
 Building
Allowances (Division 43 ITAA 1997)
Income producing buildings can be eligible for building allowances,
provided construction commenced after 17 July 1985, or in the case of short term
travellers accommodation after 20 August 1979. The rate of write-off is either 2.5%
p.a. or 4% p.a. dependent upon construction commencement date.
Building allowances apply to the overall qualifying
component of the original or refurbishment construction cost. These are calculated
from the date of completion of construction (excluding the cost of all plant and
non-eligible items).
The following table shows an example of the property tax
allowances available to property investors when claims are professionally prepared.
Residential Property with a Purchase Price of $175,000 which
includes a land value assessment of $45,000 |
| Year |
Division 42 Depreciation |
Division
43 Allowances |
Totals
|
| 1 |
1,800 |
1,900 |
3,700 |
| 2 |
2,500 |
1,900 |
4,400 |
| 3 |
1,700 |
1,900 |
3,600 |
| 4 |
1,200 |
1,900 |
3,100 |
| 5 |
900 |
1,900 |
2,800 |
| 6+ |
4,600 |
66,400 |
71,000 |
| Totals |
$12,700 |
$75,900 |
$88,600 |
*Figures based on
acquisition after 30/6/00
Additional Claims
Renovations, extensions, repairs, and write-off of demolished works can provide additional
opportunities for the investor to increase the deductions and return on their property.
How do I submit a claim?
To submit a property tax allowances claim to the
Australian Taxation Office (ATO), an investor should request a property tax allowances
schedule from a professionally qualified person. Quantity Surveyors are
professionally qualified persons under Tax Ruling 97/25 and their schedule will
substantiate an investor's depreciation claim upon lodgement of their tax return with the
ATO.
How is my claim analysed?
Since all properties are different, a standard approach
to depreciation cannot be applied. In order to maximise the deductions available for each
specific property and to substantiate the claim to the ATO, N&B Residential
Depreciation conducts a thorough on-site inspection of the premises. Following the
inspection a Quantity Surveyor will examine all available drawings and documents, then
calculate the appropriate deductions and allowances for the property.
When should I obtain a property
tax schedule?
The best time is usually as soon as possible after
settlement. Our staff can then identify items included in the original purchase
price as distinct from any items and/or expenses incurred during the remaining period of
the property ownership. The ability to analyse these costs allows for greater
accuracy and maximum returns from the calculation of depreciation and building allowances.
How much will this service cost?
Fees are structured to reflect the building type, volume
of reports required (multiple units within one complex may attract a discounted fee) and
the depth of analysis required. N&B Residential Depreciation would be pleased to
provide an obligation free proposal for your specific property investment. All fees
are tax deductible in the year of payment.
Do I have to purchase a property
tax allowances schedule each year?
Our property tax allowances schedule includes a summary
of the investor's tax claims for the initial ten years. However, should any of the
property's specifications change through refurbishment, extension, or demolition during
that time, an additional report should be generated to achieve the maximum allowable
deductions.
What happens if I am audited?
Should the ATO audit an investor, items within the
schedules may need to be defended. N&B Residential Depreciation will defend all items
included in their schedules as required. Whilst the defence of our schedules will
not form part of the initial fee agreement, N&B Residential Depreciation will provide
continuing professional services for clients following delivery of the property tax
allowances schedule.
What is a Quantity Surveyor?
A Quantity Surveyor is an independent professional
consultant to the construction and property industries. Typically, Quantity
Surveyors provide construction cost advice to property owners, investors, and developers.
However, N&B Residential Depreciation offers investors specialist advice on
property tax allowances relating to income producing properties.
Who is N&B Residential
Depreciation?
N&B Residential Depreciation is part of the Napier
& Blakeley Group, an international firm of Quantity Surveyors who have specialised in
providing property tax allowances advice in Australia since 1985. Our research division
monitors all legislation changes and ATO interpretations ensuring a seamless and cost
effective service to property owners, investors and developers across Australia. The
firm today employs over 100 professional managers and staff at offices in Melbourne,
Sydney, Brisbane, Gold Coast and Sunshine Coast.
Reproduced with permission of N&B Residential
Depreciation Quantity Surveyors
Contact N&B Residential Depreciation Quantity
Surveyors:
Direct Call: 1300 790 790
Direct Fax: 1300 133 387
E-mail: resdep@napier.net.au
Mailing Address: GPO Box 9951 (in your local capital city)
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