What your property clients are still getting wrong about depreciation

Depreciation itself hasn't changed, and anyone with a grandfathered property, a new build, a commercial asset or an SMSF holding isn't caught by the changes. But once losses are quarantined and carried forward, every deduction inside them needs to hold up. The rough estimate that slipped through before these changes won't survive a closer look.

Then there's the ATO's usual tax-time attention to rental claims. Its random enquiry work has found errors in the vast majority of rental returns they review. Most of those errors aren't fraudulent; they’re just investor guesswork at play.

It’s a misconception that hasn’t changed in years. Investors assume they can claim without a formal schedule that new properties are the only ones that qualify, or they have a go at estimating the numbers themselves and either leave deductions unclaimed or claim things they shouldn't.

Renovated properties are the worst of it. The owner can't see the structural work buried in the walls, so it never gets claimed, and at the same time, they'll claim the new oven at whatever the receipt says without a thought for effective life. I've lost count of the renovation claims I've reviewed that were wrong in both directions.

Part of the problem is that the rules genuinely are confusing for anyone not qualified to read the fine print. The distinction between capital works and plant and equipment trips people up constantly. Capital works (the structure itself: walls, roofs, driveways) are claimed under Division 43, generally at 2.5 per cent per annum for up to 40 years from the completion of construction.

Plant and equipment (ovens, carpet, air conditioning) are claimed under Division 40 over each asset's effective life. And since 9 May 2017, previously used plants and equipment in a secondhand residential property generally can't be claimed by the new owner. That last rule is probably the single most common thing I have seen investors get wrong.

Accountants see these files before we do, which puts you in the best position to catch the problems.

What I'd look for:

• A depreciation claim with no schedule behind it.
• A high-value purchase with no quantity surveyor report. The bigger the property, the more that's usually being missed.
• A schedule that predates a renovation. If the property has changed, the schedule is stale.
• Line items that look like guesses. If the client can't tell you whether something is capital works or plant and equipment, they probably never classified it.

Where construction costs aren't known, the ATO accepts estimates from quantity surveyors under TR 97/25. It generally doesn't accept them from accountants, valuers or real estate agents. That's not a turf claim; it's just the ruling, and it's why the fix for most of these files is a professional schedule rather than a better guess.

None of this is hard to put into practice. Get clients to order a schedule at purchase, or straight after a renovation while the information is fresh. Explain the capital works and plant and equipment split, and the post-2017 rule, before they lodge rather than after. And put a depreciation check into the annual review for every property client. Early July is the right time, since a schedule ordered now covers the full year ahead.

Depreciation is a non-cash deduction, which is exactly why it gets treated carelessly. With the reform now law and the ATO matching more data every year, carelessness is getting expensive.

Theo Mavratzakis is a registered tax agent and director at TDA Tax Depreciation.