The answer is simple, increase the amount of your next tax return or reduce your tax payable, meaning more money in your pocket each week. You need to complete a Tax Depreciation report in order to unlock the potential of negative gearing associated with your investment property. As Kerry Packer once said “if anybody in this country doesn’t minimise their tax, they need their heads read!…”.
According to CoreLogic’s 2016 study (RP Data), there are approximately 2.5 million residential investment properties in Australia, which equates to an asset class of nearly $1.37 trillion. These 2.5 million properties are owned by 1 in 6 Australian residents. That means, Jim your mechanic, Bob in the cubical next to yours or Tina the kids swimming coach, is likely the owner of an investment property.
What many of us do not realise is that you do not simply earn money from the rent or capital gain of an investment property, you unlock significant tax benefits. An investment property is essentially a business, and like any business there are ‘write-offs’ against the business income. For an investment property, these ‘write-offs’ are in the form of the depreciation of the asset.
If you are not aware of the magic of depreciation, it is simply the reduction in the value of an asset of time, due to wear and tear. Think of a business vehicle, as you drive the car, it’s value is diminishing as the kilometres rise and the age of the car increases. The same goes for an investment property, while the land will typically increase in price, the improvements (ie. the house, including its structure, fixtures and fittings) decrease. The depreciation of these improvements is what we address in a tax depreciation Report. We assign a value to the asset, and assess the depreciation claim (in accordance with the ATO’s Tax Ruling), which you use to increase your tax return or reduce your tax payable. If you do not complete a Tax Depreciation Report you are paying more than your fair share of tax.
In our internal studies we have found that nearly 34% of the reports we complete are for property owners that have owned the property for more than 3 years. What does this mean? it means for the last 3 years tax returns these owners have not maximised their tax savings. If you are one of this large percentage, the news is positive, typically Accountants can amend tax returns for up to 2 years for individuals and up to 4 years for trusts, companies and self-managed super funds1.
To complete a Tax Depreciation Report is simple with ‘The LEAD Process’. This process, which has grown and expanded with our increasing knowledge was established as:
- We understand our Client’s are time poor. The LEAD Process, minimises the time required from our Client’s and increases efficient report delivery.
- We required a process that allowed a streamline approach to preparing Reports that maximised potential depreciable claims.
To provide some real world examples of the magic of Tax Depreciation Reports, we have prepared the below two illustrations below on the potential depreciable claims of an investment property.
* Estimated value only.
The figures contained in the above examples are estimates only based on a typical property and do not represent a particular person or property. These figures should not be relied upon for taxation purpose (or any other purposes) as they have been supplied for marketing example purposes only. LEAD Consultants will not carry any liability for the data above (expressed or implied, included or omitted). Independent legal, financial and taxation advice should be sought before relying on any of the above information.
In the above examples, should Jim own two properties, the first a 5 year old home, with an asset value of $200,000, the second a brand new unit with an asset value of $320,000. For Jim, it is not a question on whether he should complete a depreciation schedule, it is why has he not known about them until now. Jim earns $180,000 per year and therefore is in the highest tax bracket. What this means is for every dollar we save Jim in his Tax Depreciation Report he does not pay in tax. If Jim had not have completed a Tax Depreciation Report he would have been nearly $100 worse off each week.
The allowable depreciation claim of your investment property is dictated and governed by the ATO. While the ATO spells out the guidelines of depreciation, it requires a licenced Quantity Surveyor (which LEAD Consultants are) to piece together the report. The guidelines dictate that within any property are two types of depreciable assets, Division 40 & Division 43. To put it simply, Division 40 covers the depreciation of ‘plant & equipment’ (ie. any removal fixtures and fittings within a property like, an oven, air conditioner, carpet, pool filter, garage door motor or garden irrigation system), Division 43, covers the ‘Capital Works’ (ie. the structure of the house, the plasterboard wall, the framing, the roofing, joinery or tiling).
In order to complete the report, The LEAD Process steps through 4 simple phases outlined below:
- PHASE 1 – Decision to Save
This phase is the most important, it is where our client decides they want to save on their tax or increase their tax return and therefore need to complete a Tax Depreciation Report.
- PHASE 2 – Investment Acceptance
This phase involves the process of identifying the depreciable property and providing the investment acceptance by our Client’s to allow us to begin The LEAD Process.
- PHASE 3 – The Reporting Procedure
An inspection undertaken by LEAD Consultants is the first part of this phase. During the inspection our Deduction Maximisation Model is utilised to ascertain depreciable assets and maximise your deductions. The Deduction Maximisation Model is input into our reporting software producing a report ready for issue.
- PHASE 4 – Finalisation
The final phase involves the issue and ongoing liaison relating to your report. We forward your report and invoice to your Accountant so that you can start claiming for these deductions. Did we also mention the cost of our report is a tax deduction!
At LEAD Consultants, we pride ourselves on delivering a high-quality experience, through professional, efficient communication and delivering on promises. Our promise to our clients are:
- If we cannot find a depreciation claim of more than the value of our invoice in the first year, your report will be free.
- Your report will be delivered within 5 working days of the inspection.
- We will liaise directly with whatever party necessary to complete the report, this may be your Accountant or the Property Manager.
We encourage you now to make contact with us to unlock the full potential of your investment property.