Melbourne Market Research

Scores of property investors in Melbourne are sitting on a relative gold mine that they know nothing about and are missing out on thousands of dollars of extra income each year.

In Australia, where owning an investment property is encouraged by the government, a great number of landlords are overlooking a major financial incentive offered to them that they could knock 30 percent off their taxable income each year. And, with the end of the financial year almost upon us, it should be every investor’s aim to submit a tax return that maximises the amount of money they can claim back from the government.

Tax depreciation may not be the most intriguing of terms, but its significance in the property investment world is often overlooked by those who should be giving it the most attention – landlords. In essence, depreciation is the decrease in value of an asset such, as a building or a dishwasher, over time and the Australian Government will effectively pay landlords compensation for this loss in value every time they submit a tax return – if the landlords know how to make the claim.

The managing director of tax depreciation and quantity surveying company Asset Economics, Matthew Stanley, says too many investors are missing out on this major tax break and therefore losing thousands of dollars a year.
“Investment property is all about producing an income and it’s all about offsetting your taxable and it’s all about offsetting your taxable income,” Mathew says. “If you are not getting a tax depreciation report, you are effectively missing out on a 20 to 30 per cent reduction in your taxable income.”

Of course, the reason the government pays this money back is not simply out of goodwill or as a gift. The main purpose is to support the investor financially; to ensure the covered items are maintained at a useable level for tenants or so the money can be used to replace those items.

The Australian Taxation Office will allow for depreciation on the building if the property was built after July 18, 1985, but for older properties, any renovations carried out after that date may still be eligible. 

Matthew Stanely says Asset Economics, which provides depreciation reports in Brisbane, Melbourne, Sydney and the Gold Coast as well as the Sunshine Coast, supplies up to 5000 reports a year for customers but adds there are many more people who are missing out on securing this major tax incentive. “It constantly amazes me that not all people do it,” he says.

“Accountants need to set it on their agendas so their clients are aware of it as well. Good accountants will always recommend getting a depreciation report done.”

So what sort of return can you expect from the tax man once you’ve submitted your tax return and depreciation report? As a general rule, the newer the property, the more items and the higher the amount of depreciation you can claim, but owners of older investment properties can also claim for the reduction in value of many items, and certain recent renovations too, such as appliances in a new kitchen.

The Australian Taxation Office will allow for depreciation on the building if the property was built after July 18 1985, but for older properties, any renovations carried out after that date may still be eligible. 

Just what is eligible, how much it’s worth and how much it will reduce in value each year can be a complicated matter and that’s why accountants, usually, will recommend a professional quantity surveyor carries out the initial assessment for you.

At about $450.00 plus GST for the service, it isn’t the cheapest piece of paper you will ever get your hands on as an investor, but it’s clear that over its 10-year life span it will be worth significantly more to you. And the good news is that it’s 100 percent tax deductible itself.

Matthew’s advice is clear. Everyone already investing or seeking to invest in property should do their homework as to exactly what money they can earn off their property beyond simply collecting rent. There are numerous avenues where money can be recouped or written off against your annual income, and depreciation is one of the most significant. “Property investment isn’t as easy as it used to be,” he says. “You have to become a more sophisticated investor when you buy property. People need to learn more about depreciation and the rights and wrongs of property investment.

“It’s a learning process for some people and they should be guided by their accountant. Unfortunately, there are some accountants who don’t value it as much as they should. But look at all the wealthiest people – they all have property. You can never say no to property.”

What you can claim

Here is Matthew Stanley’s list of items is an investment property that are eligible for depreciation.

CAPITAL WORKS (known as division 43)

This is deemed to be a capital write-off of the original construction cost at 2.5 percent per annum for 40 years.

PLANT (known as division 40)

This covers anything that generally has a life span of less that 10 years. For example, for each rental property you will have to replace the carpet generally every 10th year. These items are analysed separately to the physical construction.

Think you can’t get any more money out of your investment property? Welcome to the world of depreciation.

Depreciation is used to stimulate the building / property sectors. Without the depreciation benefits, some property investments are simply not attractive in terms of return percentages.

Investment property is all about producing an income and it’s all about offsetting your taxable income. If you are not getting a tax depreciation report, you are effectively missing out on a 20 – 30 percent reduction in your taxable income.

Matthew Stanely, managing director at Asset Economics