Tax Depreciation Secrets every Renovator Should Know Copyright 2011 Bradley Beer Director (B.Con.Mgt, AAIQS, MRICS), BMT Tax Depreciation Quantity Surveyor. All Rights Reserved. Brad has over 14 years experience in the building and construction industry. As a result he has substantial knowledge and specialist experience in tax depreciation and construction costing. Brad has helped thousands of Australian property investors increase the cash flow of their investment properties. As an experienced property investor himself, Brad has taken advantage of knowledge gained from the industry and he can show you the difference depreciation can make. All types of income producing properties have substantial taxation benefits available to be claimed. BMT Tax Depreciation can help unlock the cash flow potential in investment properties saving your clients thousands and helping you provide a value added service! 80% of property investors are missing out on thousands of dollars in depreciation deductions from their investment property. As a building gets older, items wear out they depreciate. The ATO allows property owners to claim this depreciation as a deduction. Depreciation can be obtained by any property owner who obtains income from their property. Obtaining a depreciation report that maximises deductions may result in your investment property returning a positive income. Quantity Surveyors are one of a select few professionals who specialise in providing depreciation reports. BMT Tax Depreciation pride ourselves on maximising depreciation deductions for the investor, the quality of our report, our ability to meet fast turnaround times and the continuing development of alliances with some of the biggest real estate and development companies in Australia. With offices in every state and territory and over 120 staff, BMT service all regions of Australia. BMT Accounting can be contacted on 1300 728 726 alternatively please visit www.bmtqs.com.au for more information. DISCLAIMER: The Materials are not intended to replace professional independent advice. You are advised to seek advice from qualified practitioners. Every effort has been made to provide reliable information, as information can become outdated with new research, the Author cannot be held responsible for any outdated information, error, omission or adverse outcomes resulting from the use of the materials. The Materials are based on information available at the time of provision and cannot be expected to cover all developments arising from subsequent developments. The materials are not definitive statements on the subject matter. The author does not guarantee the accuracy, currency or completeness of the information in the Materials. The Author does not accept any liability for any injury, loss or damage incurred by use of or reliance on the Materials. The Materials are of a general nature and are intended to assist the reader s comprehension of issues relating to [insert]. It is not intended to provide specific advice to specific persons financial or property interests. Please consult your financial or property professional advisor when seeking to apply the materials. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 2
4 secret ways to make your renovation deliver even more value Has the time come to renovate your investment property? Thinking about the types of new fittings and fixtures before installing them may generate you thousands of dollars in depreciation deductions. Make sure you do everything to maximise the cash flow potential of your next renovation project. Many investors purchase properties that require improvement. They usually do this with the sole purpose of renovating to create equity and generate extra rent. Once you have decided to renovate your investment property, it is important to ensure you obtain the best long term value from the money you are outlaying. Renovations can be expensive, so it makes financial sense to obtain the maximum depreciation benefit where possible. When it comes to deciding which new item to install in a property, some consideration should be applied to the depreciation potential of the new item. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 3
These next 4 techniques will deliver more value to your bottom line... 1. Your product selections are the key! Which new floor covering should you install to increase your depreciation potential - carpet, floating timber floorboards or tiles? The depreciation available on these items differs due to their varying effective lives. If you spend $2000 on floor coverings, for example: Item Effective Life Depreciation 1st Year Carpet 10 years $400 Maximum Floating Timber Floorboards 15 years $267 Tiles 40 years $50 Deciding between an air conditioning unit and ducted air conditioning? If you spend $5000 on cooling, for example: Item Effective Life Depreciation 1st Year Air Conditioner - Split 10 years $1000 Maximum System Ducted Air Conditioning Unit 15 years $667 (Figures based on Diminishing Value method using current legislation) THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 4
Considering ornamental light fittings or down lights? If you spend $2000 on lighting, for example: Item Effective Life Depreciation 1st Year Ornamental Light Fittings 5 years $800 Maximum Down Lights 40 years $50 As shown in the above examples, installing assets for their depreciation potential is certainly worthwhile. Depending on the size of the property and the extent of the renovations, the deductions obtained from the new items may improve your cash flow each financial year by thousands of dollars. In many cases, renovations can be funded by the immediate write off of old items and the depreciation deductions from the new items. Effective lives Explained The effective life of an asset is used by a Quantity Surveyor to work out an asset s decline in value. The Australian Taxation Office (ATO) describes an effective life as the period of time that a depreciating asset can be used by any entity to produce assessable income: assuming it will be subject to wear and tear at a reasonable rate, assuming it will be maintained in reasonably good order and condition, and having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned. Source: www.ato. gov.au 2. Depreciation deductions on structural renovations If structural construction work is completed as part of the renovations (such as a new roof, walls or ceiling), this can also be depreciated. Any work carried out after 18 July 1985 (residential property) and 20 July 1982 (non-residential property) will be eligible to claim the capital works allowance (Division 43) as well as any plant and equipment deductions. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 5
3. You can claim on someone else s expenditure! When the quantity surveyor completes your tax depreciation report, they should always take into consideration the renovations carried out by previous owners. Even though you may not have carried out the work yourself, there may be depreciation deductions for you to claim. A thorough site inspection is undertaken on your property, the quantity surveyor will identify previous renovation works. Further council searches can also expose previous renovations carried out on the property. Always consult a depreciation expert about your entitlements. Maximising the depreciation available in your investment property may improve your cash flow position each financial year you ll pay less tax! BMT Tax Depreciation can offer obligation free advice about your property s depreciation potential pre and post renovation simply call the office and speak to us about your property scenario. 4. STOP EVERYTHING: Before you even lift a hammer there is money to be made! Have you considered the concept of scrapping? Many investors can claim depreciation deductions on the items that they remove from the property before they renovate this removal of items is often referred to as scrapping. This means that if you remove items such as old carpet, stoves, hot water services or air conditioning units from your property, you may be able to write them off as a 100% tax deduction in the year of removal. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 6
Scrapping: An Easy Way to Increase Cash Flow Pre-Renovation Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, demolition of any existing structure or fixture onsite that would have been eligible to claim deductions for depreciation (Division 40) or building write off allowance (Division 43). With the age of some properties now requiring renovation there are significant tax advantages that can be generated over and above normal depreciation. Prior to demolition or renovation, many investment property owners remain unaware that the old assets within their property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are replaced or scrapped, owners may be entitled to claim them as a tax deduction. Before you discard old items or demolish your investment property, check to make sure you aren t throwing dollars away! How does an investor benefit by scrapping? Scrapping of existing structures onsite is a very effective method of obtaining deductions within our tax system. It can provide additional tax credits for investors who demolish or dispose of existing buildings or any part of it which was owned as an investment asset and eligible to produce income. Essentially if an item is scrapped, the written down value (WDV) of the item can be written off as a tax deduction in the year the expense is incurred. To calculate the scrapping value, the quantity surveyor or client s accountant identifies the items that were removed or scrapped in the renovation process. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 7
Case Study Jim purchased a 60 year old 3 bedroom townhouse in Paddington. In its pre-renovation condition, the house contained carpet, vinyl, blinds, an air conditioner, old stove, hot water service and light fittings. Upon his accountant telling him about the potential depreciation deductions available in old, pre-renovated properties, Jim decided to get a scrapping report before he started any work on the property. BMT visited the site and conducted a full site inspection, taking note of all the items that could be written off before they were thrown out. The following deductions were obtained: Jim then took the scrapping report to his accountant and claimed $6,270 in depreciation deductions that year in his personal tax return. Over the following 12 months, Jim completed his renovations, including an extension at the rear of the property. He again contacted BMT Tax Depreciation to come and assess the renovated property to achieve the maximum depreciation deductions. This second report, took into consideration all new additions (stainless steel oven, cooktop and rangehood, new carpet, air conditioning unit, etc) as well as calculating the construction write off allowance now available on the extension. Both Jim and his accountant were impressed with the total depreciation claim on the scrapped assets and renovated property of $16,000 in the first year alone! THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 8
How is Scrapping Calculated? The first report is undertaken prior to any renovation or refurbishment. The quantity surveyor prepares a report identifying the value of all plant and equipment and qualifying capital expenditure contained within the property. A second report is then prepared after completion of the renovation, identifying the value of all new plant and equipment and capital expenditure within the property. The assets within the building that are no longer present can be written off immediately. Scrapping is a complicated process that requires the expertise of a specialist Quantity Surveyor in conjunction with your accountant. Why scrap items? There are several reasons why an item may be scrapped that generally fall under the heading not fit for purpose. They include; Obsolescence; Functionally inadequate; Dated style; Original form was inappropriate or does not maximise the form and function of the property; or Additional value to the owner is obtained from a renovation. To maximise a scrapping claim focus should be given to items classified under Division 40 (often termed plant & equipment ) as these items have the highest depreciation claim and often the greatest individual value. It is important to note that a valuation of all items, including those to be retained and those to be scrapped in the refurbishment process is required with adequate photographic records retained for possible future auditing by the Australian Taxation Office. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 9
In Conclusion The concepts outlined in this guide can provide you as a property investor with a very attractive tool to maximise the tax benefits available from the refurbishment of an existing building, both immediately and in continued ownership. Substantial deductions can be achieved when the correct decisions are made at purchase and during the renovation process. Many investors remain unaware that pre-renovation/demolition investment properties contain depreciation deductions. If you are unsure about your entitlements, contact BMT Tax Depreciation before you start any work on your property. They may be able to obtain you thousands of dollars in depreciation deductions you never knew were available! THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 10
WHAT NEXT? I hope you enjoyed this Success Guide, part of a free series brought to you by Your Property Success. My name is Jane Slack-Smith, I am the founder of Your Property Success and also a property investor, educator and market commentator. The reason I launched www.yourpropertysuccess.com.au was to give me a way to provide low-cost high-content property investment education to ordinary Australians and to help people just like you to take the steps towards financial freedom. This is no get-rich quick scheme, nor is it about expensive but ultimately useless gimmicks and tricks. Your Property Success delivers self-paced learning and practical exercises, through affordable 6-week e-courses, designed so you can quickly establish the action steps and move forward. My intention with Your Property Success has always been to pass on all the knowledge of someone who has been there, done it and made the mistakes so that you don t have to! I have spoken at seminars and workshops around Australia and have become increasingly concerned that the cost of these is creeping up. I believe you should not have to be wealthy to become wealthy! I believe education should be affordable and that everyone should have the opportunity to create a better life for him or herself. Yes, you can go to the local library and get all the books you need to learn about property investment but if you want a short cut, then get your education from someone who has done it successfully in a low-risk way. You may have spent several years getting a formal education for your profession so that you could earn decent money and give yourself and your family a comfortable existence so why not invest a little time into the vehicle that will get you there sooner? For a list of courses see overleaf or visit www.yourpropertysuccess.com.au to view the full range of learning resources available to help you get started on your own property success. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 11
SEQUENTIAL E-COURSES These e-courses are designed to help you with each step involved in property investing. The are structured into 6 modules (one module per week) and include practical exercises to help solidify your learning and help get the understanding from mind to muscle. Each course also comes with a workbook for you to record your progress and complete the exercise/s for each module. This workbook will become your property investing playbook and you will refer to it time and again as you make your first, second or even tenth purchase. The sequential courses are designed to be taken in a specific order, as each builds on learnings from the previous. If however you feel that you already have a good grasp of the concepts in some courses you are free to choose only those courses that suit your needs. 1. The Foundations of Low-Risk Property Investing: assessing goals, budgeting and defining your strategy and property buying criteria 1. Knowing Your Numbers: working out what you can borrowing, getting your finance together, differing loan types and who pays for the costs of the property 1. Locating a Property: what to look for and where, websites and resources to find the property, what to look for during inspections and how to negotiate 1. Signing to Settlement: what to include in your letter of offer what is the process involved, requirement for landlords insurance, what is a depreciation schedule?, How to complete a quick reno and how to appoint a property manager 1. After You Buy: Dealing with buyer s remorse, protecting yourself through insurance, managing your property and unlocking opportunities for the future growth of your portfolio. There is also a range of stand-alone e-courses available for those who want additional information on selected topics; see next page. THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 12
STAND-ALONE E-COURSES These stand alone e-courses can be taken in any order. They are designed to complement the sequential e-courses by providing additional learning opportunities to enhance your property investing knowledge and skills. However you do not have to have taken any of the sequential e-courses in order to benefit form the learning provided in these stand alone courses. Top Four Fears of Property Investing: overcoming these will set you up for success. First Time Buyers: targeted at those buying investment property / principal place of residence in the long term and making plans now to have everything ready to go when they are ready. Great product for those starting work. Renovation Techniques: advanced techniques covering, cosmetic, structural, high end renovations, how to assess a property for renovation and where you are going to get the biggest bang for your buck and then templates for influencing valuations to tap the equity to do it all again. Advanced Finance: Trust structures, Why you should spread the risk and use multiple lenders, how Lenders Mortgage Insurance works and the importance of managing your exposure to the 2 main insurers, how buying with diversification in mind can save your thousands and using your SMSF to purchase property Advanced Techniques: advanced property strategies, commercial property, multiple dwellings eg granny flats, developing, renovating and more. For more information on these e-courses or to register for any of the courses mentioned here please visit www.yourpropertysuccess.com.au THE TAX DEPRECIATION SECRETS EVERY RENOVATOR SHOULD KNOW PAGE 13
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