Tuan Duong appeared on the Smart Property Investment Podcast Network with host Phil Tarrant, discussing the most popular depreciation questions that investors ask. Below you can listen to the full podcast.
My property is second hand, can I still claim depreciation on it?
There are some rules and legislation around what can be claimed, especially around the second-hand property.
There are two types of depreciation – division 40 plant and equipment and division 43 capital work (building depreciation) – allowed at 2.5% per annum for 40 years.
For Division 40 plant and equipment – before 9 May 2017, when you purchased the property and rented it out, you could always claim even if it’s a second-hand property, albeit at a reduced asset value as it’s a second-hand asset.
In 2017, the Federal Budget scrapped the ability to claim on second-hand plant and equipment and therefore, if you settled or exchanged property, i.e. signed a contract after 9 May 2017, you could no longer claim on second-hand plant and equipment for residential property owners whether it’s individuals or self-managed super funds. Companies and commercial properties are exempt.
Are there any reasons to still do a depreciation schedule with the legislation change?
If you’ve purchased a property before 9 May 2017, you definitely should still buy a depreciation schedule.
Depreciation schedules can be grandfathered, i.e. retrospectively applied back to your original date of purchase, and because you purchased the property before 9 May 2017, you’re protected from this new legislation. Therefore, you can still claim on both division 40 and division 43 for tax depreciation.
If your property is purchased after 9 May 2017, it’s still worth buying a tax depreciation schedule if it’s been built after 17 September 1987 – this is the cut-off date for properties that are still eligible for claiming the division 43 capital works depreciation.
This means the building is only depreciable if it’s been built after 17 September 1987. In my experience, I advise we still do a check (at no extra cost to you) to see if we can find any depreciable assets to claim on which we’ve commonly been able to do in the range of $2,000 to $2,500 for any buildings that are built after 1987.
Can I claim any depreciation on knockdown rebuilds?
Yes, you can.
We prepare specific reports for this called scrapping reports.
If you’re scrapping or demolishing and the property is still depreciable, then you can claim on it provided it’s second-hand, i.e. purchased before 9 May 2017.
You’ll be entitled to claim depreciation on any residual depreciation from the time that you choose to knock it down. This includes both plant and equipment as well as capital works (division 43) based on the scrap value that’s undeducted provided it’s been built after 1987.
Typically, for properties that are purchased second-hand and built between the late 80s to early 90s, we usually find $10,000 to $15,000 worth of deductions. When you combine this with construction costs as a tax deduction, you could potentially be looking at $50,000 as an immediate tax deduction.
I want to renovate my property, is it still worthwhile for me to get a depreciation schedule?
Anything built or renovated after 27 February 1992 is worthwhile doing.
You’d be able to claim full depreciation on any brand new renovations for both plant and equipment (Division 40) and capital works (Division 43).
It’s important to note that you can’t buy something second-hand and then attempt to claim full depreciation on it. It must be brand new from a retailer with an issued tax invoice showing GST you’ve paid for to claim for this.
It’s also good to know that if a property has been substantially renovated before you buy it, you’re entitled to claim tax depreciation on the renovated property.
This is something we’ve seen quite commonly in recent years with many of our clients who have bought second-hand properties but have newly renovated bathrooms or kitchens that they didn’t install themselves yet could still claim depreciation on this.
I haven’t done a tax depreciation schedule before, can it be backdated?
Yes, you can, but there are some general rules to back-claiming any tax deduction.
As an individual taxpayer, you can only amend your tax return for the last two years from the time you receive your notice of assessment or four years if you’re a business.
If you want to go further back, you can do this by raising an objection with the ATO and prove this if you feel you have a genuine claim on any further tax deductions that were missed. Your accountant can provide guidance on this.