Investors missing out on thousands of dollars in tax savings

By Angus Raine

A surprising piece of information came across my desk recently, which indicated that 80% of Australian property investors are failing to claim ‘depreciation’ on their investment properties. 

The research, based on anecdotal evidence from our network of offices and the experience of BMT Tax Depreciation, shows around four out of five landlords overlook this entirely legitimate tax break, thereby paying far more in tax than necessary.

Apart from missing out on legitimate tax breaks, the fact that up to 80% of investors are missing out suggests to me that many don’t grasp the concept of depreciation. The good news is that we all still have a few weeks until the end of the 2012/13 tax year on 30 June to find out, and then finalise any loose ends regarding possible depreciation claims.

To bring you up to speed, depreciation is a term used to describe a decline in the value of an asset over time, due mostly to wear and tear. In regards to a rental property, anything from built-in kitchen cupboards to clotheslines is a depreciable item, as are door and window fittings, driveways, garages, fences, retaining walls, sinks, basins, baths and toilet bowls.

It’s also possible to claim the wear and tear on a rental property’s carpets, vinyl, and linoleum, as well as hot water systems, heaters, solar panels and air conditioning units. Many also forget that blinds, curtains and light fittings are depreciable items, as are security systems. Meanwhile, those investors with an apartment may also be able to claim the depreciation of ‘common property’ such as lifts and even gym equipment.

It is important to note that investors can claim between 10-40% annually, and sometimes more, on depreciable items, while in many cases 2.5% of the building cost can be claimed each year for 40 years. As a guide to the potential tax savings, BMT indicates that an investor could claim cumulative depreciation of approximately $50,000 in the first five years on a new two bedroom unit costing $400,000.

What’s more, my colleague Brad Beer, Managing Director of BMT, says generous depreciation claims are not restricted to new properties. According to Brad, up to 60% of a new property’s purchase price is potentially tax-deductible over the life of the property, while for established properties, it’s also possible to back date any missed depreciation costs by two years.

With this in mind, it’s probably worth having a formal depreciation schedule drafted by a registered quantity surveyor such as BMT, which can set you back a one-off fee around $700. In my book, this represents great value as a depreciation schedule is not only tax deductible, it can help landlords generate potentially thousands in depreciation claims and help them comply with our relatively complex tax laws.

Breakout: Depreciable items

Investors can claim depreciation on a broad range of rental property items including:

  • Stoves
  • Exhaust fans
  • Floating timber floors
  • Bathroom accessories
  • Garbage bins
  • Furniture
  • Carpets, vinyl, linoleum
  • Hot water systems, heaters, solar panels and air conditioning units
  • Blinds, curtains and light fittings
  • Security systems

Angus Raine is a leading commentator on the Australian property industry and has been CEO of the Raine & Horne property group since 2006.

Mr Raine started his real estate career over twenty six years ago, previously working with three blue-chip international real estate firms, before becoming director of Raine & Horne Holdings Pty Limited in 1998.
Mr Raine is an accomplished real estate specialist and his academic and industry qualifications include a Diploma of Business (Valuation) and a Diploma of Business (Franchising). He is also a registered valuer, a Fellow of the Australian Property Institute, Member Royal Institution of Surveyors (MRICS), and a licensed real estate, stock and station business agent.
Angus is a Graduate of the Harvard Business School’s Owner/President Management Programme, and has a professional certificate in Advanced Corporate Real Estate (API/UWS).
Since 2000, Mr Raine has been a committee member of the Family Business Association’s New South Wales chapter.