Accountants across the country will be looking at ways to strengthen their relationships with this group by ensuring their investment properties are appropriately structured and generating the maximum amount of income.
A survey undertaken by BMT Tax Depreciation found around 80 per cent of property investors were failing to take full advantage of tax depreciation. This figure included only those investors for whom the savings afforded by a tax depreciation schedule would have outweighed the cost of ordering one, meaning they were almost certainly missing out on thousands of dollars of savings each year.
Further evidence that tax depreciation schedules are an underutilised tool for accountants was uncovered by the Australian Taxation Office in a report released in 2011. Findings of the report revealed that only 30 per cent of claims submitted on investment properties included depreciation for available capital works deductions and only 19 per cent included depreciation of plant and equipment assets – an enormous loss of potential cash flow for property investors.
With a very active property investor segment at the moment, accountants have the ability to strengthen their trusted adviser status with this group by ensuring they maximise tax deductions on their properties. Real estate agents, financial advisers, mortgage brokers and, of course, accountants are all able to alert clients to this cost-savings tool at any point. Doing so is bound to result in a significant amount of relational goodwill, repeat business and positive word-of-mouth publicity.
Many investors who are aware of the existence of tax depreciation generally may still mistakenly believe themselves ineligible. This may be due to a belief that their property is too old to qualify for such deductions. Capital works deductions are unavailable to owners of residential property where construction commenced prior to 18 July 1985; likewise, owners of commercial properties miss out where construction began prior to 20 July 1982. These same restrictions do not apply to the depreciation of plant and equipment assets as limitations here do not relate to age but rather to the condition and quality of each depreciable item.
Properties built prior to 1985 see investment property owners claiming an average of $4,042 in annual depreciation deductions in the first five years, a saving which your clients would certainly thank you for alerting them to.
Likewise, stronger depreciation deductions can also be attained for properties post-1985.
Investors who are actually claiming tax depreciation may still not be maximising their claims. This is because many investors are not claiming plant and equipment assets at all, are forgetting to include less obvious items, or are incorrectly claiming items as capital works at a subsequent slower rate of depreciation. Specialist quantity surveyors responsible for creating tax depreciation schedules are able to make a comprehensive assessment of all the items which might be claimed, not just the more frequently-claimed carpet, hot water systems and light fittings, but the less obvious items such as garbage bins, mechanical exhausts and door closers. These items can add up to around 15 per cent of the total construction cost of a residential property and included in the claims can also be additional works, extensions or internal refurbishments which have taken place over the life of the property – even work completed by a previous owner.
Where construction costs are unknown or unavailable, accountants are not able to accurately estimate costs, necessitating the use of a qualified quantity surveyor and a tax depreciation schedule.
If your clients do not yet profit from the benefits of a tax depreciation schedule, you may find this to be a unique opportunity to demonstrate your ability to increase their cash flows in a way which they may not have been aware of.
With activity in the property market at elevated levels of late, there is no better time to explore tax depreciation and the value add it may provide to Australian property investors. The situation can be a ‘win-win’ for both you and your client.
BMT Tax Depreciation is an accredited member of the Australian Institute of Quantity Surveyors (AIQS), the Royal Institute of Chartered Surveyors (RICS) and the Auctioneers & Valuers Association of Australia (AVAA).