A number of investors are entering the property market by teaming up with a friend, family member or business partner to purchase an investment property. This poses questions when investors come to complete their annual income tax return, particularly given ownership structures can influence how deductions are calculated.
As an investor, it's important to know how ownership structure can affect your cash flow. Two methods of depreciation assist in the process of maximising depreciation claims for co-owners - immediate write-off and low value pooling.
IMMEDIATE WRITE-OFF
Australian legislation allows property investors to claim an immediate write-off for assets with an opening value of less than $300. In a situation where ownership is split, an accountant can apply this rule and claim an immediate write-off to items where an owner's interest in the asset, as opposed to its total opening value, is below $300.
LOW-VALUE POOLING
Where an owner's interest in an asset is less than $1,000, these items will qualify to be placed in a low-value pool. Pooling is a method of depreciating plant and equipment assets at a higher rate to maximise depreciation deductions. Investors who decide to place assets into a low-value pool can claim them at a rate of 18.75 per cent in the year of purchase and 37.5 per cent thereafter.
IMPORTANT LEGISLATION
Legislation introduced in 2017 brought about major changes to plant and equipment depreciation claims. Plant and equipment depreciation refers to the wear and tear that occurs to the easily removable fixtures and fittings found within the property. Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. Investors who purchase brand-new residential and substantially renovated properties, commercial real estate or add new plant and equipment assets to a second-hand residential property can still claim substantial depreciation deductions.
CO-OWNERSHIP CASE STUDY, 50:50 SPLIT
The following example highlights the importance of splitting assets' opening value and applying depreciation legislation to each person's interest in each item. A couple purchased a residential investment property with a 50:50 ownership share. A site inspection performed by a depreciation expert found $27,462 worth of eligible plant and equipment assets. A Quantity Surveyor conducted an assessment on the depreciation deductions and the results are shown below.
Depreciation deductions in this scenario are based on a full financial year. The plant and equipment assets are brand new and comply with 2017 legislation.
By applying a split to the value of the assets in a co-ownership scenario, an additional $2,099 could be claimed in depreciation deductions.
ABOUT THE CONTRIBUTOR
Article provided by BMT Tax Depreciation. Bradley
Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief
Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit
www.bmtqs.com.au for an Australia-wide service.