The ATO has issued several warnings recently to investors about claiming deductions on rental properties.
Common errors highlighted by the ATO include claiming deductions for:
· Properties not actually available for rent.
· Properties only available for rent for part of
· Claiming costs as repairs when they should be
depreciated as capital improvement
· Claiming capital works incorrectly as plant and
It is very important for investors to have a basic
understanding of legislation around depreciation and the terminology used to
categorise deductions that can be claimed within a property.
So it is important to recognize the difference between
repairs, maintenance and capital improvements.
Here are some key depreciation terms and RealRenta tips for
avoiding incorrect claims:
works deductions or Plant & Equipment Depreciation
Deductions for capital works cover the structural elements
of a building, including fixed and irremovable assets, ie roof, walls, built in
cupboards, windows, doors etc
Depending on the age, investors can claim capital works
deductions at a rate of 2.5% per annum
If a residential property was built before the 15thSeptember 1987, restrictions will apply.
Investors who own older properties may still be entitled to
capital works deductions for any renovations, including those completed by
On the other hand, plant and equipment items, depreciate at
a much faster rate, ie carpets, hot water systems, air conditioning etc.
The deductions for these items are determined by their
quality, not by their age.
To calculate depreciation for plant and equipment, the
effective life of each individual asset set by the ATO should be referred to.
However, it is not uncommon for investors to self assess depreciation for plant
and equipment items.
In doing so, they may put themselves at risk of the
Categorizing plant & equipment assets as
capital works or vice versa
Capital works items being claimed at higher
rates than they should be
Incorrectly determining a plant & equipment
assets effective life based on its condition
and maintenance or Capital Improvements
The ATO has very clear definitions for investors to
determine the difference between what is considered a repair, regular
maintenance and what is capital improvement.
A repair involves any
work completed to fix damage or deterioration of a property.
considered any work which will prevent damage or deterioration.
are work which improves an asset beyond its original condition.
· How to
avoid the risks of incorrect claims
Investors can avoid the risks of incorrect claiming by
seeking the advice of a Quantity Surveyor.
A Quantity Surveyor will complete a site inspection of the
property to identify all of the plant and equipment assets, take measurements
and conduct research to find the correct capital works deductions and outline
deductions, for plant and equipment assets based on their ascribed individual
A Tax Depreciation Schedule will outline these deductions
for the Investors’ Accountant to process their claim. This will ensure the
correct deductions are claimed and minimise the risk for both and Investor and
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Tuesday, 13 August 2019