Tax Deductions

We are often asked, what items can you claim a full deduction for, and what items are 'depreciated'. Basically an 'Expense' is something that you may be entitled to an immediate deduction in the income year you incur the expense. A 'Capital Works Deduction' is an expense of a capital nature that are depreciated over time and or may form part of the cost base of the property for capital gains tax purposes.

What is an EXPENSE?

• advertising for tenants
• bank charges
• body corporate fees and charges
• cleaning
• council rates
• electricity and gas
• gardening and lawn mowing
• in-house audio and video service charges
• insurance (building, contents, public liability)
• interest on loans
• land tax
• lease document expenses (preparation, registration, stamp duty)
• legal expenses (excluding acquisition costs and borrowing costs)
• mortgage discharge expenses
• pest control
• property agents fees and commissions
• quantity surveyor's fees
• repairs and maintenance*
• secretarial and bookkeeping fees
• security patrol fees
• servicing costs, for example, servicing a water heater
• stationery and postage
• telephone calls and rental
• tax-related expenses
• travel and car expenses (for rent collection, inspection of property, maintenance of property)
• water consumption and supply charges

* Repairs and Maintenance is the most commonly asked item. Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch.
So, that means that repairs carried out to a newly purchased property are NOT expenses, and are deemed Capital Works. Refer to the examples below on repairs prior to renting a property and when it is no longer being rented….

ATO Example on 'repairs prior to renting out a property'
"The Hitchmans needed to do some repairs to their newly acquired rental property before the first tenants moved in. They paid an interior decorator to repaint dirty walls, replace broken light fittings and repair doors on two bedrooms. They also discovered white ants in some of the floorboards. This required white ant treatment and replacement of some of the boards. These expenses were incurred to make the property suitable for rental and did not arise from the Hitchmans' use of the property to generate assessable rental income. The expenses are capital in nature and the Hitchmans are not able to claim a deduction for these expenses."
It is important to note here that under the amended taxation laws from 9th May 2017, if a landlord is living in their investment property preparing it for rent and install 'plant and equipment' such as carpet or air conditioning units, the items will be considered previously used and cannot be claimed. It is important that works are undertaken when the property is vacant.

ATO Example on 'repairs when the property is no longer rented out'

"After the last tenants moved out in September 2013, the Hitchmans discovered that the stove did not work, kitchen tiles were cracked and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In October 2013 the Hitchmans paid for this damage to be repaired so they could sell the property. As the tenants were no longer in the property, the Hitchmans were not using the property to produce assessable income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were completed before the end of the income year in which the property ceased to be used to produce income."
To find out more on Capital works deductions and how to claim, read on…..

What is a CAPITAL WORKS DEDUCTION?

• replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
• improvements, renovations, extensions and alterations, and
• initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

How are these deductions calculated? Well this is where it gets complex and where the benefits of having a professionally prepared 'Tax Depreciation Schedule' prepared by a quantity surveyor such as BMT are invaluable. I know of quite a few examples where our landlords literally were able to claim thousands of dollars worth of extra deductions once they had their report done – I highly recommend it.

To work out your deduction there are two methods. Both methods are based on the effective life of the asset (which is determined by ATO ruling TR2014/4. The 'Diminishing Value' method is most commonly used and assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time (allowing higher deductions immediately). The 'Prime Cost Method' assumes that the value of a depreciating asset decreases uniformly over its effective life (meaning smaller claims up front, which is why it is not as popular.) The decline in value calculator on the ATO website will help you with the choice and the calculation.

Diminishing Value Method

Base value* x Days held x 200% (on or after May 06) or 150% (prior to May 06)
365 asset's effective life
*for the income year which an asset is first used or installed ready for use for any purpose, the base value is the asset's cost. For a later income year, the base value is the asset's opening adjustable value plus any amounts included in the assets' second element of cost for that year

Prime Cost Method
Assets cost x Days held x 100%
365 asset's effective life
Example of Claim using 'Diminishing Value' method for the supply and installation of $2000 split system air con
On the 1st July you install a split system air con (so unit is held for 365 days). The cost to supply and install the unit is $2000.00 The ATO effective life is 10 years. The claim for the first year using the above calculation would be $400. The following year, the written down value of the (cost $2000, less 1st years depreciation of $400) is used as calculate the 'base value' of $1600. This would then mean the claim in the following year is $320.
Effective life of the most common items from the current ruling TR2014/4 are;

• Cooktop – 12 years
• Oven – 12 years
• Dishwasher – 8 years
• Carpet – 10 years
• Floating timber floors – 15 years
• Vinyl – 10 years
• Aircon ducted r/c – 15 years
• Aircon evaporative – 20 years
• Aircon split system (under 20kw) – 10 years
• Ceiling fan – 5 years
• Heater – 15 years
• Heater ducted – 20 years
• Hot water gas or electric – 12 years
• Hot water solar – 15 years
• Light fittings – 5 years
• TV Antennae – 10 years
• Solar System – 20 years
• Window Blinds – 10 years
• Window Curtains – 6 years
• Smoke Alarm – 6 years
• Watering System – 5 years
• Garden shed – 15 years
• Septic/Sewage system – 8 years

This is a complex subject, which is why it is important if you have an investment property you have a professionally prepared Tax Depreciation Report (we recommend the services of BMT Quanitity Surveyors) land a good accountant complete your tax to maximise your return. Claims/deductions can be made for items that were already in the house when you purchased it!

For more information view the full Guide for Rental Property Owners from the ATO.