Maximising deductions for capital allowance and asset depreciation is not straight-forward. Different legislations outline the rules and rates for calculating both Division 40 (plant and equipment) and Division 43 (building). Add in the 2017 legislation changes that affect individual entitlements and the understandings around claiming for depreciation becomes even less clear. Ensuring you have an accurate and ATO compliant depreciation schedule is important.
As registered tax agents, quantity surveyors and depreciation specialists, servicing thousands of commercial and individual clients and supporting hundreds of accountants around Australia, this article aims to share some of the most common errors or misunderstandings we encounter from accountants and their clients when it comes to claiming depreciation.
Summary of common errors:
- Applying ATO rules for individuals to company structures;
- Failing to claim for capital allowance and depreciation on property held in a SMSF;
- Ruling out older properties;
- Forgetting about second-hand asset depreciation as a capital gains offset;
- Missing depreciation deductions for a new or scrapped business fit-out and plant and equipment items;
- Not back-claiming depreciation deductions for previous years.
Applying rules for individuals to company structures
The 2017 legislation changes ruled that depreciation was no longer claimable on second-hand assets contained within income-producing properties held by individuals and family and discretionary trusts.
This legislation update does not apply to properties held in a company structure. Both residential and commercial investment properties that are held within a company structure qualify to claim for both Division 43 and Division 40 tax deductions. Claiming for both ensures tax deductions are accurate and effectively maximised for the company owner.
Read more about the 2017 legislation changes and their impact here.
Failing to claim depreciation for properties held in SMSF
Depreciation is one deduction we find is often overlooked by trustees and accountants of self-managed superannuation funds. SMSFs are eligible to claim all of the allowable expenses associated with ownership of income-producing property, including depreciation.
Claiming depreciation reduces the tax payable by a SMSF, and failing to claim could mean the SMSF overpays taxes by thousands of dollars each year.
Read more and see our case studies about claiming depreciation on a property held in a SMSF.
Ruling out capital allowance and depreciation deductions for older properties
Clients regularly tell us their accountant advised against the need for a depreciation schedule as their property was considered too old (built pre-1987). Whilst it remains true that deductions are not claimable for pre-1987 construction works, most properties built in that era have since undergone substantial capital improvement through renovations and extensions. All of these additional works can be historically dated and costed by a quantity surveyor and can generate tens of thousands of dollars in Division 43 claims.
Add to that any new Division 40 (plant and equipment assets) that have been added to the property by the new owner and tax deductions increase even further.
Whilst not deductible during ownership, the capital losses associated with depreciated second-hand assets is applied at sale (potentially reducing CGT).
Rarely do we encounter a property for which a capital allowance and depreciation schedule is not worthwhile.
Read more and see case studies about the fantastic depreciation results we have reported for older properties here.
Forgetting about second-hand asset depreciation as a capital gains offset
As highlighted above, depreciation of second-hand Division 40 assets are no longer annually deductible for individuals and family and discretionary trusts.
However, when the property is sold the capital loss associated with the depreciation of those second-hand assets should be applied (typically reducing CGT).
Ensuring you have a depreciation schedule that professionally attributes historical dates, costs and effective lives to those assets ensures that depreciation is accurately recorded to ensure ATO compliance when reporting capital gains.
Learn more about the relationship between depreciation and capital gains tax.
Missing depreciation claims on new or scrapped business fit-outs
Building owners and leaseholders often change the fit-out within a building to meet their own business needs, whether it be at the beginning of a new lease, during a refurbishment, or when leaving a premises. In each case, the owner of the assets is entitled to claim depreciation on assets that are being used, and a lump sum when disposing of or ‘scrapping’ those assets.
Carpet, blinds, partitions, appliances all add up and can create substantial deductions for the owners.
Learn more and see case studies highlighting the benefits of maximising capital allowance and depreciation on commercial premises.
Not back-claiming for previous years deductions
Sometimes an individual or entity has owned an income-producing property for a few years or so before having a depreciation schedule completed. In these cases, it is allowable to amend previous years tax returns to ensure those deductions for capital allowance and depreciation aren’t lost.
The period of time for which you can back-claim deductions differs depending on whether the property is owned by an individual or another entity. Generally, individuals can back-claim up to 2 years, and other entities up to 4 years.
We’ve written a blog with case studies, specifically about back-claiming depreciation that you can read here.
Our expert team at Capital Claims is happy to field any questions you may have about maximising tax deductions for capital allowance and depreciation. Our expert team has been serving investors and their advisers for decades, you can check out our team members and their expertise here. If you have any questions regarding capital allowance and depreciation please get in touch with our senior consultant Alek Konjarski here, or contact our office on 1300 922 220.
We also have over 150 informational blogs about all things depreciation that include examples and case studies. Please browse and search our catalogue here. If you would like a blog article or presentation for your audience please don’t hesitate to get in touch with Kylie Waddingham.
Other articles from our 2024 Winter enews
Not all tax depreciation schedules are equal
Repairs, Maintenance vs Capital Improvements
How claiming for depreciation improved cash flow for this Perth Business
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