Renovations... all on schedule

Owners of income-producing properties are eligible to claim depreciation deductions due to the wear and tear on the structure of the building and the plant and equipment assets contained within it.

Many investors lack the knowledge to claim these deductions correctly, particularly if they don’t seek advice. This can place investors at risk of a potential audit by the Australian Taxation Offi ce and may even result in them having to pay cash back.

The ATO has warned property investors to be particularly vigilant when claiming rental property deductions this end of fi nancial year. Common mistakes highlighted by the ATO include claiming rental deductions for properties not genuinely available for rent, incorrectly claiming deductions for properties only available for rent for part of the year and not claiming deductions correctly for any work completed to the property.

To help property investors avoid making incorrect claims, a depreciation schedule from a specialist quantity surveyor can often help.

A tax depreciation schedule makes life easier for accountants to lodge depreciation claims on behalf of their clients. A comprehensive schedule will outline all of the deductions available for structural items (for example, walls, doors, windows and roofs), as well as for depreciable plant and equipment assets (for example, carpets, hot water systems and air-conditioning units).

When renovating an investment property, a depreciation schedule becomes even more important. Here are some reasons why.

Reason 1: The new owner is entitled to claim deductions for renovations completed by a previous owner.

Depreciation deductions can sometimes get missed when a previous owner has completed a renovation to a property.

Often when an investor purchases a property, they will not be aware of all items that have been updated or replaced. This is particularly common for work that isn’t visible, such as new plumbing, waterproofi ng and electrical rewiring.

Quantity surveyors also often see examples where some of the most common assets found within an investment property get missed – for example, garbage bins, door closers and smoke alarms.

When a specialist quantity surveyor completes a tax depreciation schedule, a site inspection must be organised. Visiting the property allows the quantity surveyor to act as an additional set of eyes for the accountant who, without visiting the property, might only be aware of the depreciable assets as described by their client. Seeing the property also helps to ensure that all depreciable items are documented appropriately, as the quantity surveyor takes detailed notes, measurements and photographs of all the depreciable items within the property.

A quantity surveyor will also use their expert knowledge to calculate deductions using methods such as immediate write-off and low-value pooling.

The site inspection, historical searches and the quantity surveryor’s expert knowledge of depreciation legislation are all essential in determining the correct and maximum deductions for any investment property owner.

Reason 2: Any renovations completed may entitle the property owner to additional deductions.

If an investor is planning on completing any work to their property, it is recommended that they consult with a specialist quantity surveyor prior to starting renovations.

The owner may be entitled to claim a deduction for any assets that are removed and disposed of during the renovation. This process, known as scrapping, allows investors to claim any remaining depreciable value for items removed from the property within the fi nancial year of their removal.

Speaking with a specialist quantity surveyor prior to commencing work can assist an investment property owner in two ways. First, a quantity surveyor can provide advice that may assist them when deciding which depreciable items to remove and which assets to install to help maximise future depreciation deductions. Second, it allows the quantity surveyor to perform a site inspection and complete a tax depreciation schedule prior to the removal of any depreciable assets. This schedule can also act as evidence should the ATO query any of the depreciation deductions claimed, including those for removed assets.

Reason 3: After work is completed, a depreciation schedule can be updated to outline deductions for any newly installed items.

Updating a depreciation schedule after any major work has been completed to an investment property is highly recommended to allow any new additions to be captured. The new schedule will outline all the deductions the property owner can claim for the remaining life of the property.