5 December 2014
About to renovate?
The 10 depreciation considerations for every investor
Renovation shows multiplying over the last decade, many people choosing DIY path to spruce up their homes and investments. Last year the value of alterations and additions to residential buildings was estimated to be over $500 million, according to the Australian Bureau of Statistics.
All up, investors are claiming $25 billion worth of rental reductions every year.
WHAT YOU ARE CLAIMING?
Around June every year the Australian Taxation Office (ATO) issues a warning to property investors to be careful about what they claim. Their major warning is aimed at people who are claiming repairs. Investors often claim repairs that are illegitimate. Things such as renovations or replacing broken features are not repairs; rather they are capital improvements, something that an investor cannot claim. This can be a grey area and can get quite confusing.
Consider these questions before deciding whether you can claim the work as a repair or whether you need to depreciate the work over time:
- Was the work related to the wear and tear of the property while it was an income producing asset for you?
- Were the repairs carried out when you initially brought the property? If so, these are defined as ‘initial repairs’ and cannot be claimed as an outright deduction.
- Did you replace a whole item in its entirety? If so this is not a repair
- Did you improve the material when you carried out the work? If so, this is called a capital improvement, not a repair, and is to be depreciated.
THERE IS MORE TO MAKING A PROFIT THAN JUST A GOOD RENOVATION
One of the major mistakes investors make is having a mindset of: “The faster the completion, the sooner the returns”. Although in some cases this is true, at other times investors are so fixated on improving their properties that they miss out on gains that they could have been getting even while they are still planning out their renovations.
The point is to always be on the lookout for things that can turn a profit.
WHAT ARE YOU GETTING RID OF?
Throwing away items that can later be claimed as depreciation assets is a mistake that investors commonly make. When renovating a property, its old unusable features (e.g. an old dishwasher) can still be claimed as a tax deduction. In the situation where the item cannot be recovered after being thrown out, with photographic proof and the help of a quantity surveyor it can still result in you gaining some return on the item.
It is important to note that the property must have been earning income for some time before the purchase was made in order to claim any residual or scrapping value.
IDENTIFY THE VALUES OF YOUR ITEMS
The values of old items in your property are the basis of the tax deductions you can get at the end of the first year of ownership. Without these values no tax deduction can initially be calculated.
So before throwing away old items in your income producing property identify the original values of these items by holding an inspection with a quantity surveyor.
FINISHING A DEPRECIATION SCHEDULE IN TIME
The depreciation schedule you get on your property before renovation starts backs up your depreciation claims on old assets. It doesn’t back up any new assets put in once the house has been renovated. In order to claim these new assets a new depreciation schedule must be conducted before renovation finishes.
KNOW WHAT CAN BE WRITTEN OFF
Once renovations have been completed many investors think they can start writing off any newly installed assets, but this is not the case. A new item has to depreciate over its useful lifetime or the time frame specified for that item to last, before it needs replacing.
ITEMS YOU CAN’T DEPRECIATE
Although we can claim the depreciation of a property investment as a tax deduction not all construction costs are eligible to be claimed.
Here are some of the things that don’t qualify:
- Demolition costs
- Site clearing- It is important to note that excavating the site for a basement can be claimed as that’s considered part of the new basement
- Landscaping- Landscaping elements such as retaining walls and concrete elements can be claimed. Plants don’t qualify- If it grows, you can’t claim it.
- Developers profit
DEPRECIATION ON OLDER PROPERTIES
For properties built before July 1985 you cannot claim any building depreciations. But if a property built before this time is then later renovated you can, in most instances claim depreciation on the renovation. As long as the renovation took place after 1985, you are entitled to depreciate them.
A renovation on an older property that includes carpets, new blinds, a new bathroom and a new kitchen could cost up to $25,000. These assets can have big depreciation returns because the items being replaced have a relatively low effective life, this is the reason they needed replacing in the first place. Depreciation benefits like this can be up to $5,000 to $7,000 in just one year.
FACTORS THAT THE ATO USE TO CATEGORISE ITEMS UNDER BUILDING OR PLANT ALLOWANCE
You can choose the effective lifetime or depreciation rate of an item that comes under the plant allowance. But for items that come under the building allowance category they must be claimed at 2.5 percent per annum. By knowing how the ATO choose what assets go into what category you can get a better understanding of what claims you can get on your assets.
The ATO determines which items go into each category based on factors such as:
- The degree of affixation to the property
- The physical life of the asset
- Manufacturing specifications
- Industry standards
- The level of repairs by users of the asset
- If the asset is leased
THE TAX COMMISSIONER BELIEVES THE “MANUFACTURING LIFE” DOESN’T NECESSARILY EQUAL THE EFFECTIVE LIFE
This is important to consider because the Tax Commissioner determines many assets to last for 40 years when they might not necessarily last that long.
Here is a list of items that the Tax Commissioner believes will last for 40 years but most likely won’t:
- Kitchen cupboards
- Light fittings
- Shower Screens
- Floor and wall tilings in wet areas
- Wet areas ceilings
What the tax commissioner fails to understand is that not only do some of these items fail to be effective for 40 years but also, in many cases these items need to be updated for style reasons as investors need modern assets to attract new tenants.
It’s good to know what you’re entitled to and if you don’t find someone who does who can help you.
HAPPY BUYING, RENOVATING AND SELLING!
Contract changes that buyers and sellers of land in NSW should know about
The latest NSW 2014 edition of the Contract for Sale and Purchase of Land features a number of changes to the 2005 edition, including new clauses on electronic conveyancing.
The new 2014 edition of the Contract for Sale and Purchase of Land was issued by the Joint Copyright Holders, Law Society of New South Wales and the Real Estate Institute of New South Wales, last month.
Although the contract is largely the same as the 2005 edition, it contains a few changes:
- The contract has been renamed, from “Contract for Sale of Land” to “Contract for Sale and Purchase of Land”.
- The front page of the contract has a few changes, including the addition of buyer’s agent as well as storage spaces as an improvement and solar panels as a possible inclusion.
- There are a few new boxes to tick, including the vendor agreeing to accept a deposit bond and the parties electing to use the new electronic conveyancing for completing the purchase.
- The removal of references to “vendor’s duty”. Although it was still relevant at the time the 2005 edition was being prepared, shortly after release the vendor’s duty was scrapped.
- A new clause on “breach by the vendor” has been added. This new clause 8.2 is important because in the previous drafts of the contract there had been extensive clauses in relation to termination for default by the purchaser, but there was no corresponding clause in relation to default by the vendor. This lack of mutual breach clauses could be seen as being an unfair contract term. The new clause restores the balance.
- A new clause 30 on electronic conveyancing – Gary Newton, a partner at CBP Lawyers, says the new clause 30 on electronic conveyancing sets out a mechanism for the party’s representatives to confirm if it is proposed that the matter will proceed using electronic conveyancing and a mechanism for a party’s representative to notify the other party that the matter will need to default to the paper environment, as well as the payment of fees and costs associated with that change.
The electronic conveyancing clause sets out:
- How to go about creating the work space
- How to populate the work space with data
- How to send certain invitations to join the work space
- Subsequent communications between the parties as they prepare for settlement
- Time frames for the supply of adjustment figures, completion of a financial settlement schedule
HAPPY BUYING RENOVATING AND SELLING!!
FAVOURITE PICS OF THE WEEK
HAPPY WEEKEND EVERYONE!!