As end of financial year approaches, Australian property investors must finalise their tax returns, encompassing individual and business obligations based on their structure.
To maximise tax benefits, property investors should ensure all eligible deductions are claimed. Tax depreciation is one of the most significant deductions that applies to both residential and commercial properties, improving cash flow by reducing taxable income. Investors, developers, and small business owners should review their portfolios and ensure their tax depreciation schedules are up-to-date to optimise financial outcomes.
What is Tax Depreciation and Why Does it Matter?
Tax depreciation allows property investors to claim deductions for the wear and tear of structures and assets, reducing taxable income. The ATO allows investors to offset this ‘decline in value’ against their rental income, reducing the amount of tax payable each year. A tax depreciation schedule, prepared by a quantity surveyor, outlines these deductions for capital works and plant/equipment. This non-cash deduction improves cash flow yearly without requiring additional expenses.
Who Needs a Tax Depreciation Assessment Before EOFY?
A tax depreciation assessment can offer substantial financial benefits for income-producing properties, including residential, commercial, and specialised buildings. Even older properties can offer substantial deductions, especially if you’ve carried out renovations, upgrades or fit-outs. Many investors are surprised to learn that upgrades to kitchens, bathrooms, or flooring can significantly increase their claimable depreciation.
If you own shops, offices, or other commercial buildings, the scope for depreciation claims can be even greater. For eligible build-to-rent developments that commenced construction after 9 May 2023, the capital works deduction rate has increased from 2.5% to 4%. This means a $5 million build-to-rent project can now claim $200,000 annually in deductions at the new rate, compared to $125,000 under the previous rules.
Property Developers and Small Business Owners
Developers can claim depreciation on both the construction and plant and equipment in new builds. Small business owners who lease or own their workspace are also able to claim deductions for fit-outs and improvements. Businesses should ensure all relevant financial information, such as business activity statements and super guarantee contributions, are included when preparing their annual tax return.
SMSF Trustees
Self-managed super funds (SMSFs) with income-producing property can claim depreciation, which reduces the fund’s taxable income and boosts long-term returns.
The Financial Benefits of a Tax Depreciation Schedule
A professionally prepared depreciation schedule can reduce your taxable income each year. Schedules for capital works typically cover up to 40 years of deductions, maximising long-term benefits. If you have missed previous claims, it is generally possible to backdate and amend returns for up to two years, so you may still be able to claim unclaimed deductions, depending on your circumstances and ATO rules.
Depreciation can increase annual cash flow for many investors.
How to Prepare for EOFY: Action Steps for Investors
- Gather all relevant property records, including purchase contracts, renovation details, and receipts for capital improvements.
- Engage with a registered quantity surveyor to prepare or update your tax depreciation schedule.
- Review your current claims with your accountant to ensure all eligible deductions are included and you are not missing out on any entitlements.
Common Questions and Misconceptions
Q: Can I claim depreciations on an older property?
Yes, especially if you have completed renovations or upgrades. Even older properties may have claimable deductions.
Q. What items are considered plant and equipment?
This includes carpets, blinds, appliances, hot water systems, and air conditioning units.
Q. Is a depreciation schedule a one-off cost?
Yes, a schedule typically covers up to 40 years of deductions for a specific property.
Q. How do ATO rule changes affect my claims?
The increased build-to-rent deduction rate can significantly increase your annual deductions if your property is eligible.
Q. Can I claim for renovations and additions?
Yes – improvements and upgrades can increase your deductible amount.
Q. How can a tax agent help make EOFY easier?
A registered tax agent can help make EOFY easier by ensuring your tax return is compliant, all relevant financial information is included, and you maximise your deductions while meeting all due dates and payment obligations.
Key Takeaways
- Tax depreciation can save you thousands and improve your annual cash flow.
- Schedules are valid for up to 40 years and can be updated for renovations or new assets.
- Recent ATO changes, including higher build-to-rent deduction rates, make this year especially beneficial for a review.
- Claiming retrospective years (up to two years) is possible in many cases if you have missed deductions previously, subject to ATO amendment rules.
- Reviewing your business income, profit and loss statements, and ensuring all relevant financial information is included in your annual tax return, will help you stay compliant and set your finances up for the year ahead.
Get help from our property specialists
Our advisors are specialists in property tax. Talk to us to ensure you are managing the tax implications of property investment effectively.