Tax Depreciation
Residential and Commercial Property Tax Depreciation
The Tax Agents Services Act 2009 was introduced and requires the registration with the Tax Practitioners Board of anyone providing advice regarding depreciation. This includes eligible Quantity Surveyors. TDQS specialises in the provision of independent professional advice and can help you to maximise your permissible deductions by preparing an Australian Tax Office compliant Tax Depreciation Schedule. TDQS uses Prime Cost and Diminishing Value Method to calculate the best tax depreciation amount you can obtain from income producing assets. Along with Low Value Pooling options, TDQS will ensure every item is captured to give clients the best tax return. TDQS work with accountants and strata managers to ensure investment property owners gets the best out of their tax.
Reasons for choosing us
- ATO compliant reports Diminishing Value & Prime Cost Method of Depreciation.
- Low Value Pooling including breakdown of plant and articles.
- Summary and graph comparison of both methods.
- Available 24 hours a day - 7 days a week.
- Reports prepared by a qualified quantity surveyor & registered tax agent Director.
- Our fee is 100% tax Deductible.
- Transferable schedule to new owners if the property is sold.
- 40 years schedule for new properties.
- Back dated reports to the date of first lease of property.
- Easy payment options.
- Liaison with your accountant if required.
- Full property inspection if required.
Case Study
To explain why most investors like the prospect of depreciation we need to build a case study.
Surie part-owns and operates a floor tiling business in the Eastern suburbs of Sydney. She is paid a base salary of $50,000 per annum, plus she is entitled to a profit share which for the year ended 30 June 2012 came to a further $25,000. Her superannuation contributions are on top of her salary.
Two years ago Surie attended a free seminar and was convinced of the merits of buying an investment property. She signed a contract to purchase a one bedroom inner city flat for $400,000 (inclusive of closing costs) on the basis she pay a 10% deposit and the building would be ready for rent on the 1st July 2011 at $423 per week.
The developer offered a 5.5% rental guarantee for three years provided Surie use their preferred rental managers who charge a commission of 8.5%. The rates and miscellaneous costs totalled $2,500 per annum during the first year.
Surie\'s property came with a $30,000 fit out which included designer furniture, imported carpet and modern appliances. These assets have an expected useful life of ten years from the date of first use, at which point it is expected to be worth next to nothing. She is also entitled to a capital works tax deduction based on a building construction cost of $220,000.
Surie\'s property is financed via a 90% loan ($360,000) at an interest rate of 5.7% per annum (interest only). Her loan repayment is $394.62 per week. Using this information and assuming Surie uses the prime cost method of depreciation, have a go at trying to complete her summary of property income and expense for the tax year ended 30 June 2012:
Summary of Property Income & Expense
For the Tax Year Ended 30 June 2012.
| Item |
Your Answer |
Solution |
| Rental Income |
|
Solution $22,000 |
| Rental Management |
|
Solution ($1,870) |
| Loan Interest |
|
Solution ($20,520) |
| Rates etc. |
|
Solution ($2,500) |
| Casflow Loss |
|
Solution ($2,890) |
| Fit out depreciation (1) |
|
Solution ($3,000) |
| Capital works deduction (2) |
|
Solution ($5,500) |
Tax Loss Solution ($11,390)
1. $30,000 * (100% / 10) 10% = $3,000
2. $220,000 * 2.5% = $5,500
Given the solution above, a summary of Surie\\\'s tax position is:
| Surie with |
No property |
One property |
| Salary |
$75,000 |
$75,000 |
| Property tax loss |
- |
($11,390) |
| Taxable income |
$75,000 |
$63,610 |
| Total Tax + Medicare |
($16,050) |
($12,633) |
Using this information we can build an after-tax summary to establish whether or not Surie has created wealth with her property investment.
| Surie with |
No property |
One property |
| Salary |
$75,000 |
$75,000 |
| Cashflow loss |
- |
($2,890) |
| Income tax |
($16,050) |
($12,633) |
| After-tax cashflow |
$58,950 |
$59,477 |
So, what can we say?
Despite the fact that the property is negative cashflow to the tune of $527 per annum, Surie nevertheless has more after-tax available ($59,477 compared with $58,950) by buying this property than compared with choosing not to invest in anything!
Surie is able to benefit because her non-cash depreciation deductions of $8,500 to lower her total income tax payable.
Remember that Surie has only paid 10% of the total fit out cost ($3,000 through her deposit), but can nevertheless use 100% ($30,000) of the fit out cost as her depreciation cost base. Plus she can also claim a tax deduction for the interest cost on the fit out ($27,000 * 5.7%) too (as part of the overall loan interest).
Conclusion
Is it appropriate to conclude that depreciation is always good? Well, it depends on individual circumstances. However generally, if you own investment properties. You will be better off claiming tax depreciation instead of not.
Depreciation is only a tool. When used properly it can be a great resource for investors. See further example to understand the benefit of tax depreciation.
Further Example
Summary of Property Income & Expenses
For the Tax Year Ended 30 June 2012.
| No. of Properties |
| |
Tax Depreciation |
|
| |
No Tax Depreciation |
|
| |
| |
| |
2 |
3 |
| |
2 |
3 |
| |
| Total Loan |
| |
720,000 |
1,080,000 |
| |
720,000 |
1,080,000 |
| |
| Rental Guarantee 5.5% |
| |
44,000 |
66,000 |
| |
44,000 |
66,000 |
| |
| Rental Management Fee 8.5% |
| |
(3,740) |
(5,610) |
| |
(3,740) |
(5,610) |
| |
| Loan Interest 5.7% |
| |
(41,040) |
(61,560) |
| |
(41,040) |
(61,560) |
| |
| Rates |
| |
(5,000) |
(7,500) |
| |
(5,000) |
(7,500) |
| |
| Cashflow Loss |
| |
(5,780) |
(8,670) |
| |
(5,780) |
(8,670) |
| |
| Depreciating Asset(1) |
| |
(6,000) |
(9,000) |
| |
0 |
0 |
| |
| Capital Allowance(2) |
| |
(11,000) |
(16,500) |
| |
0 |
0 |
| |
| Property Tax Loss |
| |
(22,780) |
(34,170) |
| |
(5,780) |
(8,670) |
| |
1. $30,000 * (100% / 10) 10% = $3,000 per property
2. $220,000 * 2.5% = $5,500 per property
Given the solution above, a summary of Surie\'s tax position is:
| No. of Properties |
| |
Tax Depreciation |
|
| |
No Tax Depreciation |
|
| |
| |
| |
2 |
3 |
| |
2 |
3 |
| |
| Salary |
| |
75,000 |
75,000 |
| |
75,000 |
75,000 |
| |
| Property Tax Loss |
| |
(22,780) |
(34,170) |
| |
(5,780) |
(8,670) |
| |
| Taxable Income |
| |
52,220 |
40,830 |
| |
69,220 |
66,330 |
| |
| Income Tax |
| |
(9,216) |
(5,799) |
| |
(14,316) |
(13,449) |
| |
Using this information we can build an after-tax summary to establish whether or not Surie has benefited from tax depreciation as her property portfolio expanded.
| No. of Properties |
| |
Tax Depreciation |
|
| |
No Tax Depreciation |
|
| |
| |
| |
2 |
3 |
| |
2 |
3 |
| |
| Salary |
| |
75,000 |
75,000 |
| |
75,000 |
75,000 |
| |
| Cashflow Loss |
| |
(5,780) |
(8,670) |
| |
(5,780) |
(8,670) |
| |
| Income Tax |
| |
(9,216) |
(5,799) |
| |
(14,316) |
(13,449) |
| |
| After Tax Cashflow |
| |
60,004 |
60,531 |
| |
54,904 |
52,881 |
| |
| |
| |
Cashflow Increase |
|
| |
Cashflow Decrease |
|
| |
