In­vestors in line to max­imise de­duc­tions

The Weekend Australian - Review - - Prime Space - Florence Chong

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.

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