Investors in line to maximise deductions
PROPERTY investors are allowed many tax deductions, running into thousands of dollars, but some investors are apparently unaware of their full entitlement, experts say.
Napier Blakeley tax depreciation regional manager David Liddilow says notably owners of small industrial units or warehouses or strata- titled offices often miss out on some deductions.
John L. Hill Real Estate managing director John Hill, a former national president of the Real Estate Institute of Australia, says investors are often uncertain of what can be claimed.
Hill, who runs a property management service, says depreciation allowances vary for old and new buildings.
Owners of buildings constructed after July 1985 are entitled to a building allowance — under what is known as Division 43 ITAA 1997, deductions for capital works.
Depending on when work was started, the allowance is either 2.5 or 4 per cent a year, Liddilow says. Napier Blakeley has specialised in property tax deductions and allowances for about 20 years.
Building allowances are calculated using the actual or estimated cost of the original construction or refurbishment.
Napier Blakeley says a $ 385,000 unit could attract up to $ 132,000 in building allowances over six years.
But Hill warns that there is a ‘‘ sting in the tail’’, as building allowances are added to the capital gain when the unit is sold.
He says total deductions claimed for building allowances are added to the value used in calculating CGT liability when the asset is sold.
For example, if the purchase price is $ 100,000 and the total depreciation claimed is $ 10,000, and the unit is sold for, say, $ 150,000, the amount liable for CGT is $ 50,000 plus $ 10,000.
Liddilow says capital allowances, known as Division 40 ITAA 1997, apply to all buildings.
Owners are able to claim depreciation allowances on plant and capital expenditure, such as lifts, carpets and airconditioning.
Since the May 2006 budget, investors can claim an accelerated depreciation under what is known as the ‘‘ diminishing value’’ method, which has been increased by 200 per cent, Liddilow says.
The other method is known as the prime cost method.
If an owner has to replace a dishwasher in an apartment, under the diminishing value method, Liddilow says he or she can claim 20 per cent of the cost of replacement a year, compared with 10 per cent under the prime cost method.
Investors in a new project are entitled to the depreciation of many small items.
But it takes a specialist firm like Napier Blakeley to be able to itemise items, such as taps and so on, which cost less than $ 300.
Liddilow says the firm prepares more than 1000 depreciation reports for property owners each month.
He says if someone bought a $ 700,000 inner city apartment, based on the diminishing value method, the purchaser could claim $ 18,000-$ 20,000 in the first year.
Under the prime cost method, he says, the total claimable is $ 13,000-$ 14,000.
‘‘ The difference is you get more back upfront under the diminishing value method, but at the end of the day whether you use prime cost or diminishing value methods, the benefits are the same.’’
Property owners can also claim deductions for the costs of repairs and routine maintenance.
If the kitchen benchtop or a door is broken, the cost of the replacement is deductible.
Hill says agents’ management fees, bank fees, interest payment on the mortgage, land tax, council and water rates, and all legitimate outgoings are tax deductible.
Terri Scheer Insurance Brokers marketing and operations manager Carolyn Majda says owners should also include landlord insurance in tax- deductible expenses.
Majda says it is often easier to appoint a property manager to look after all related accounts and expenses and to prepare an end of financial year statement detailing all outgoings for tax purposes.