ATO statistics reveal $5,784 gap Maximise deductions with depreciation

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1 Issue Biannual Publication FEATURED ATO statistics reveal $5,784 gap Maximise deductions with depreciation According to the latest statistics released by the Australian Taxation Office (ATO), 2.8 million property investors claimed deductions relating to their rental property in the income year. Of these investors, just over one million received an average capital works deduction of $2,113 while almost two million investors claimed an average deduction of $1,179 for depreciation of plant and equipment. The total average depreciation claim made by property investors who claimed both in the income year was $3,292. When compared with statistics released by the ATO for the income year, there was an increase of almost 100,000 in the total number of investors claiming deductions for their rental properties. Despite this, there was very little change in the average deductions claimed for capital works or plant and equipment assets. The average capital works deduction in compared with the previous year increased by $83 and the average plant and equipment deductions increased by $40. Based on data collected from tens of thousands of BMT s depreciation schedules, the average deductions found within a BMT Tax Depreciation Schedule during the income year were $9,076 for both plant and equipment and capital works, an increase of $5,784 that investors could be claiming. This could equate to an extra $50 per week in the investor s pocket, showing the value of claiming depreciation correctly. INSIDE THIS ISSUE FEATURED ATO statistics reveal $5,784 gap Expert eyes see dollars you don t 3 TECHNOLOGY Help on the go 5 MORE FOR YOU Cash flow versus capital growth 6 CONSTRUCTION COSTS Construction costs Visit our website bmtqs.com.au 3-4 TECHNICAL Are you exempt from paying Capital Gains Tax? Deductions in shared assets

2 FEATURED Expert eyes see dollars you don t The deductions a site inspection will find First year claim Stool $34 Electrical wiring $380 Rangehood $200 Sink/ tapware $14 Kitchen cupboards $625 Cook top $250 Light fixture $165 Plumbing $450 Fridge $450 Oven $433 Walls $800 Light fixture $45 Dryer $260 Shelves $4 Washing machine $300 Basin $10 Plant and equipment (first year deduction) Capital works (first year deduction) The depreciation deductions for plant and equipment in the above graphic have been calculated using the diminishing value method. Capital works deductions have been calculated at a rate of 2.5 per cent. The immediate write-off rule and low-value pooling have been applied for applicable items. An essential part of the process in maximising a depreciation claim for an investment property is a thorough site inspection performed by a depreciation specialist. When a depreciation specialist visits a property they utilise their knowledge of all of the items that are deductible and available to claim. This knowledge is recognised by the Australian Taxation Office (ATO) under Tax Ruling 97/25, in which Quantity Surveyors are listed as one of a few professionals able to estimate the cost of a building and the items contained within it for depreciation purposes. The graphic above shows some of the deductible items found and the first year depreciation amount available to an investor. From the example, we can see that this investor would be eligible to claim a total deduction of $4,420 in the first financial year alone just for the items featured. Structural items claimed as capital works deductions equate to $2,283 of these deductions, while plant and equipment assets represent $2,137 of the deductions available to be claimed. Additional depreciation deductions can also be claimed for the flooring, doors, ceilings and joinery items contained within the property. During a site inspection, a depreciation specialist will photograph every item they see and take detailed notes and measurements. This ensures the maximum deductions will be obtained when preparing a depreciation schedule for the owner. When choosing a provider, it is important for investors to ensure that a thorough site inspection will be included. Some providers outsource the inspection to contractors, which can be problematic and reduce accountability if the report is ever questioned by the ATO. It may appear as though they are getting a great price, but unless the inspector knows exactly what to look for, the initial saving in the schedule fee will be outweighed by the lost deductions each year for the life of the property. A depreciation specialist will find deductions in all corners of your investment property.

3 TECHNICAL Are you exempt from paying Capital Gains Tax? What to know if you are thinking of selling a property Before an owner decides to sell their property, they need to be aware of the Capital Gains Tax (CGT) implications that may apply. Surprisingly, many owners are exempt from CGT but are unaware of their situation, so it is worthwhile to do some research. Introduced on the 20th September 1985, CGT is the tax payable on the difference between what it cost you to purchase an asset and the amount you received when you disposed of it. TECHNOLOGY Help on the go Have you often wondered what deductions you could claim on an existing or prospective investment property? The BMT Tax Depreciation Calculator helps you to estimate the likely depreciation deductions claimable for all property types including residential, commercial and manufacturing buildings. In seven easy steps you will be able to find an estimate of the deductions available, assisting you with crunching the numbers on an investment property. The BMT Tax Depreciation Calculator is a valuable tool for those looking to purchase a property by providing a depreciation estimate and allowing you to calculate the after-tax cost of ownership. Available both online or as an app for iphone, ipad and Android phone or tablet, the calculator is an indispensable tool for property investment. Download the free app today or visit bmtqs.com.au/tax-calc to use the tool online. Visit our website bmtqs.com.au Selling price minus selling costs Minus Original purchase price plus associated selling costs When you sell a property this triggers a CGT event. Investors may not be liable for some of the costs involved in paying CGT if they fall within any of the following exemption rules provided by the Australian Taxation Office (ATO). 1. Six month rule Under the six month rule the ATO allows you to hold two primary places of residence. An exemption from CGT is available if a new home is acquired before a purchaser disposes of the old one. In this instance both dwellings are treated as the primary place of residence for up to six months if: The old property was the owner s primary place of residence for a continuous period of at least three months in the twelve months before it is sold The owner did not use the old property to provide an assessable income in any part of the twelve months when it was not the primary place of residence The new property becomes the owner s primary place of residence If you dispose of the old dwelling within six months of acquiring the new one, both dwellings are exempt for the whole period between when you acquire the new one and dispose of the old one. 2. Six year rule If the owner of a primary place of residence chooses to move out of their home and rent it out, a CGT exemption is available for up to six years after they vacate. The ATO list some reasons of when this may occur such as if the owner accepts a job interstate or overseas, is staying with a sick relative long term or is going on an extended holiday. There is currently no limit to the number of times a property owner can reset the exemption rule so long as each absence is less than six years. If you make this choice, you cannot treat any additional dwelling you own as your main residence for that period. 3. Principal place of residence Property that is owned by someone who resides, occupies or lives in the property is exempt from CGT so long as the dwelling is used mainly as residential accommodation and is located on land under two hectares in size. Only one property can be classed as a principal place of residence and therefore exempt from CGT at any one time. However, there are exemptions that apply as outlined under the six month rule. 4. Fifty per cent discount for property investors Individuals or small business owners who hold an income producing investment property for more than twelve months from the signing date of the contract before selling a property will receive a fifty per cent exemption from CGT. It is recommended to consult with an Accountant to find out how claiming depreciation deductions can impact CGT. Capital Gain (or loss) If an owner is considering the sale of their investment property they should consult with an Accountant for advice on their individual scenario. Equals 2016_TA527

4 Deductions in shared assets Common property is depreciable too As with any residential property, the structures and assets found in common areas of apartment or unit complexes will depreciate. Items found in common property areas entitle owners to depreciation deductions based on their percentage of ownership of the shared areas. The Australian Taxation Office (ATO) identifies common property as areas within an apartment complex or development that are shared between owners, including pools, driveways, lifts and stairways. To ensure depreciation claims are accurately maximised, a specialist Quantity Surveyor will assess the property s entitlements found on the Strata Plan, Plan of Subdivision (PS) or the Building Unit Plans (BUPs) and accurately calculate a percentage of ownership. A depreciation specialist will also visit the property and carry out a detailed survey including identifying, measuring and costing the building, fixtures and fittings. Common property assets may qualify for either an immediate write-off or the low-value pool, dependent on the owner s interest in the asset. For example, if the owner s portion of the asset is $300 or less, they will be entitled to write-off the full amount in the first year. If the owner s interest is $1,000 or less, the increased rates of depreciation can be applied through the low-value pool. As every development complex is different, it is important that deductions are apportioned correctly. Utilising a BMT Tax Depreciation Schedule will assist apartment and unit owners to claim the maximum deductions available. BMT Tax Depreciation is a proud member of:

5 MORE FOR YOU Cash flow versus capital growth Depreciation helps you to capitalise now All investors who purchase properties do so hoping to achieve results that will benefit them financially. A positive cash flow scenario is generally associated with buying properties that have a high rental yield. The aim is to select a property that will receive a higher income than the outgoing property expenses; for example, interest rates, property management fees, repairs and maintenance costs. This usually means the owner will not be out of pocket and the money left over can be used to reduce the loan faster, save for future properties or put away for personal use. A capital growth scenario is a longer term approach, whereby investors aim to buy a property in an area with a projection for growth. Investors aim for these properties to increase in value in the long term so that when the time comes to sell, the increase in value will far outweigh the original costs associated with buying and holding the property. Sometimes these types of properties receive lower rental yields and could see the investor with more outgoing expenses than income in the short term. No matter which scenario, there are tax implications to be aware of. In a positive cash flow scenario, any additional income earned must also be declared when preparing an annual tax return. Investors who achieve capital growth from their property must understand the capital gains implications that may apply at the time of sale. Ensuring the maximum depreciation deductions are claimed is of utmost importance for either of these strategies. The below example explains how depreciation deductions assisted a positive cash flow scenario. The investor purchased a two bedroom unit for $619,000 with a rental yield of seven per cent or $43,330 rental income per year. In both scenarios, property depreciation allows an investor to reduce their taxable income so they will pay less tax. Expenses for the property including interest, rates, repairs and maintenance totalled $39,915. BMT found $13,900 in depreciation deductions for this property in the first financial year alone. Without depreciation the investor will be required to pay $1,264 in taxes for the property. As a result, their yearly cash flow position after tax is $2,151 or $41 per week. Simply by claiming the depreciation available, the investor s yearly after tax scenario is improved to $7,294 or $140 per week, an increase of $99 per week. By claiming depreciation, the investor has more cash flow readily available. To view a scenario on how depreciation will assist a property receiving negative cash flow, visit the BMT case studies page at bmtqs.com.au/case-studies Two bedroom unit priced at $619,000 Scenario without depreciation claim Scenario with depreciation claim of $13,900 Annual income $43,330 Annual income $43,330 Annual expenses $39,915 Annual expenses $39,915 Pre-tax cash flow (income - expenses) $3,415 Pre-tax cash flow (income - expenses) $3,415 Cash flow position $3,415 Tax position (Cash flow - depreciation) -$10,485 Tax expense (pre-tax cash flow x tax rate of 37%) -$1,264 Tax refund (Tax position x tax rate of 37%) $3,879 After tax cash position (pre-tax cash flow + tax expense) $2,151 After tax cash position (pre-tax cash flow + tax refund) $7,294 Cash flow position per week $41 Cash flow position per week $140 Depreciation difference = $99 per week 2015_TA452 The depreciation deductions in this example have been calculated using the diminishing value method.

6 CONSTRUCTION COSTS Construction costs Including regional variations As per standard practice, to adjust costs for various regions simply multiply the construction cost by the regional variations opposite. This will give you an approximate cost for the construction type per square metre in your area. Regional Variations Hobart 87-97% Canberra % Melbourne % Adelaide % Sydney 100% Perth % Brisbane % Cairns % Darwin % Construction type Level of finish Low Medium High House Townhouse Unit Commercial Industrial Retail Hotel / Motel 3br weatherboard project home, level block, single level, shelf design $1,085 $1,245 $1,595 3br brick veneer project home, level block, single level, shelf design $1,130 $1,290 $1,640 3br full brick project home, level block, single level, shelf design $1,170 $1,330 $1,710 4br weatherboard home, level block, single level, shelf design $1,640 $1,750 $2,245 4br brick veneer home, level block, single level, unique design $1,740 $1,835 $2,370 4br full brick home, level block, single level, unique design $1,910 $2,230 $2,450 3br brick veneer project home, level block, two level, shelf design $1,175 $1,340 $1,720 3br full brick project home, level block, two level, shelf design $1,170 $1,440 $1,830 4br brick veneer home, level block, two level, unique design $1,810 $1,980 $2,270 4br full brick home, level block, two level, unique design $1,850 $2,030 $2,320 Architecturally designed executive residence $2,600 $3,450 $5,050 2br, single level brick veneer townhouse, including allowance for common property $1,535 $1,830 $2,120 2br, 2 level brick veneer townhouse, including allowance for common property $1,590 $1,870 $2,250 3br, single level brick veneer townhouse, including allowance for common property $1,505 $1,800 $2,090 3br, 2 level brick veneer townhouse, including allowance for common property $1,570 $1,920 $2,270 3 level unit complex, including lift, concrete structure, ground floor parking $1,820 $1,980 $2,480 3 level unit complex, including lift, concrete structure, basement parking $1,795 $1,955 $2, level unit complex, including lift, concrete structure, ground floor parking $2,090 $2,280 $2, level unit complex, including lift, concrete structure, basement parking $2,040 $2,250 $2,810 8 or more level unit complex, including lift and basement car parking $2,060 $2,430 $3, level open plan offices, including A/C & lifts, excluding fit out $1,890 $2,150 $2, level open plan offices, including A/C & lifts, excluding fit out $2,050 $2,240 $2,720 8 levels and over, including A/C & lifts, excluding fit out $2,960 $3,170 $3,350 High bay warehouse, standard configuration, concrete floor, metal clad $920 $1,040 $1,130 High bay warehouse, standard configuration, concrete floor, pre-cast concrete wall clad $1,140 $1,210 $1,360 Suburban shopping mall area including A/C $2,280 $2,400 $2,750 Supermarket, including A/C, excluding fit out $1,470 $1,590 $1,820 Single level boutique motel, including A/C, guest facilities $3,000 $3,500 $4,750 Single level tavern/hotel, including A/C, excluding loose item fit out $2,550 $3,100 $3,800 The above rates are exclusive of GST. Please visit for more information. Disclaimer The information including the Construction costs contained in Maverick is provided for general information only and on the understanding that neither BMT & ASSOC Pty Ltd, BMT Tax Depreciation Pty Ltd nor any of its officers or employees are providing professional advice on any particular matter or are liable for any error or omission in the information or any damage or loss suffered from any reliance on that information. Professional advice should be sought for your particular circumstances. The Construction Costs are average prices in a Metropolitan Area and should be adjusted with reference to specific conditions. They are not intended to be relied upon or used for tendering or pricing variations. Construction Costs include costs of labour and materials, waste, hoisting, fixing in position and a profit allowance based on prevailing market conditions but exclude any GST, costs of land, demolition and any work outside the footprint of the building. Sydney Level 33, 264 George Street, Sydney NSW 2000 Ph: Parramatta Level 1, Suite F 110 George Street, Parramatta NSW 2150 Ph: Brisbane Level 7, 320 Adelaide Street, Brisbane QLD 4000 Ph: Gold Coast Suite 30610, Level 6 Southport Central 3, 9 Lawson Street, Southport QLD 4215 Ph: Newcastle 19 Brunker Road, Broadmeadow NSW 2292 Ph: Melbourne Level 50, 120 Collins Street, Melbourne VIC 3000 Ph: Darwin Level 1, Paspalis Centrepoint Smith Street, Darwin NT 0800 Ph: Perth Level 28, 140 St Georges Terrace, Perth WA 6000 Ph: Cairns 181 Mulgrave Road Cairns QLD 4870 Ph: Canberra Level 6, 39 London Circuit, Canberra ACT 2600 Ph: Adelaide Level 5, 121 King William Street, Adelaide SA 5000 Ph: Hobart Hobart Corporate Centre Level 3, 85 Macquarie Street, Hobart TAS 7000 Ph: _MAV info@bmtqs.com.au bmtqs.com.au