Information for Property Investors

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We are often asked "what items can you claim a full deduction for, and what items are 'depreciated'." Basically, an 'Expense' is something that may be entitled to an immediate deduction in the income year you incur the expense. A 'Capital Works Deduction' is an expense of a capital nature that is depreciated over time and/or may form part of the cost base of the property for capital gains tax purposes. 

An expense can be classified as any of these things:

• advertising for tenants 
• bank charges 
• body corporate fees and charges 
• cleaning costs
• council rates 
• electricity and gas 
• gardening and lawn mowing 
• in-house audio and video service charges 
• insurance (building, contents, public liability) 
• interest on loans 
• land tax 
• lease document expenses (preparation, registration, stamp duty) 
• legal expenses (excluding acquisition costs and borrowing costs) 
• mortgage discharge expenses 
• pest control 
• property agents fees and commissions 
• quantity surveyor's fees 
• secretarial and bookkeeping fees 
• security patrol fees 
• servicing costs, for example, servicing a water heater 
• stationery and postage 
• telephone calls and rental 
• tax-related expenses 
• travel and car expenses (for rent collection, inspection of property, maintenance of property) 
• water consumption and supply charges 
• repairs and maintenance* 

* Repairs and maintenance is the most commonly asked item. Expenditure for repairs made to the property may be deductible, however, these repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs generally involve a replacement or renewal of a worn-out or broken parts, for example, replacing damaged guttering due to a storm or replacing part of a damaged fence due to a fallen branch. 

Repairs carried out to a newly purchased property though, are NOT expenses, and are deemed as Capital Works. Feel free to refer to the examples below:

ATO Example on 'repairs prior to renting out a property' 

"The Hitchmans needed to do some repairs to their newly acquired rental property before the first tenants moved in. They paid an interior decorator to repaint dirty walls, replace broken light fittings and repair doors on two bedrooms. They also discovered white ants in some of the floorboards. This required white ant treatment and replacement of some of the boards. These expenses were incurred to make the property suitable for rental and did not arise from the Hitchmans' use of the property to generate assessable rental income. The expenses are capital in nature and the Hitchmans are NOT able to claim a deduction for these expenses."

ATO Example on 'repairs when the property is no longer rented out' 

 "After the last tenants moved out in September 2013, the Hitchman's discovered that the stove did not work, kitchen tiles were cracked and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In October 2013 the Hitchman's paid for this damage to be repaired so they could sell the property. As the tenants were no longer in the property, the Hitchman's were not using the property to produce assessable income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were completed before the end of the income year in which the property ceased to be used to produce income."

A Capital Works Deduction refers to the replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator) 

In other words, they are improvements, renovations, extensions and alterations, or

initial repairs, to remedy defects, damage or deterioration that existed at the date you acquired the property. 

How are these deductions calculated?

This is where things get complicated and where the benefits of having a professional 'Tax Depreciation Schedule' prepared by a quantity surveyor such as BMT is invaluable. We've had experiences where our landlords were able to claim thousands of dollars' worth of extra deductions by having this schedule and we highly recommend it. 

There are two methods to work out your deduction, both of which are based on the effective life of the asset (which is determined by ATO ruling TR2014/4).

1. The 'Diminishing Value' method is most commonly used and assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time (allowing higher deductions immediately).
2. The 'Prime Cost Method' assumes that the value of a depreciating asset decreases uniformly over its effective life (meaning smaller claims up front, which is why it is not as popular.) The decline in value calculator on the ATO website will help you with the choice and the calculation.

For more information, view the full Guide for Rental Property Owners from the ATO.

The Australian Taxation Office (ATO) allows an owner (or owners) to claim deductions for expenses incurred when earning rental income. Depreciation allows the owner/s to claim a deduction due to the wear and tear of a building structure (capital works deduction) and its fixtures (plant and equipment depreciation) over time. Depreciation is described as a 'non cash deduction', meaning the investor doesn't need to spend any money to be able to claim it. 

An investment property doesn't need to be new to claim depreciation, however you can't claim depreciation for a property where construction commenced prior to the 15th September 1987.

Also, if you purchased a second-hand residential investment property after 9th May 2017 you're unable to claim depreciation on existing second hand plant and equipment assets, or removable and mechanical assets, eg: air cons, blinds, hot water units, dishwashers etc. You can however, claim for 'capital works' deductions like depreciation to the fixed structure of the property, eg: the actual building such as doors, roofs, basins, windows, retaining walls etc. 

What is a Tax Depreciation Schedule?

A Tax Depreciation Schedule is a professionally produced document highlighting items of plant, equipment and capital costs that may be depreciated, eg: the construction of the house, fittings and fixtures, fencing etc. It incorporates the value of each depreciable item including delivery costs, installation costs and the cost associated with bringing the plant into full operation. 

Deductions are available for forty years and you can claim depreciation for renovations and any new plant or equipment also. If a property owner has not been claiming depreciation or maximising their deductions, the previous two years tax returns can also be adjusted and amended in order to do so. 

Who can prepare a Tax Depreciation Schedule?

Many people think that their accountant can prepare a 'depreciation schedule'. However, the ATO specifically states that 'Accountants, Solicitors, Real Estate Agents and Valuers are NOT recognised to estimate construction costs for depreciation purposes (TR 97/25).

To ensure you're claiming all the associated expenses related to depreciation of your rental property we highly recommend that you obtain a Tax Depreciation Schedule. You could receive deductions of thousands of dollars per annum.

For more information about tax depreciation schedules, please visit, BMT & Assoc Quantity Surveyors or contact 1300 728 726