Tax depreciation benefits
By Paul McKenzie
In the first part of this report titled ‘Negative gearing and tax depreciations’ (The Indian Telegraph August 2015 issue), we covered how investment in property could lead to significant tax benefits
In this concluding part, we further consider how most property investors go in for new recent built properties, to avail of tax depreciation benefits. Depreciation is the capital value decline over time with its age and effective life, before it is written off.
Since the late 1980s in most cases, the Income Assessment Act legislation with the Australia Taxation Office rules, allow the capital value (does not include land or land related value) to be written off at 2.5% per annum over 40 years. This can either be diminish or prime cost methods, in which a tax accountant and their tax depreciation assessor can determinate which method is best for their client. New properties are favoured for property investors, as the tax depreciation benefits in the property when new, is in the bulk of the fixtures, such as light fittings, floor coverings, tapware, air conditioning, curtains/blinds, cooktop/oven/range hood, hot water service, dish washer, alarm system etc. A comprehensive table determines the number of effective years the fixture can be written off over time. Items less than $300 can be written off in one year. Items over $300 and less than $1,000 can be written off in four years. Other items are determined via an effective life-years table.
Tax depreciation schedules are prepared by quantity surveyors during construction or by registered tax accountants who engage tax deprecation assessors; by appropriate property related professionals who have the skill, knowledge and expertise about tax deprecation valuation assessments or quantity survey assessments. Smart property investors
tend to acquire new properties that give them the maximum tax depreciation benefit, in the first 5 to 10 years, then sell them off, when the maximum tax depreciation benefit runs out. Smarter property investors tend to buy new properties that are strata titled, for further tax depreciation benefits, with their portion share of the common property fixtures, such as lifts, swimming pools, gyms etc.
Here are a few tips for acquiring and investing in property investment –
1. Pick an area with great public transport (benefit for tenants), rising capital and rental values. Property should be close to public transport, shopping centre and other local facilities, such as a gym, club, cafes, places of worship, etc.
2. The rental prices and sale prices in the area should have a good indifference relationship, for example, if the sale prices are around $700,000, then rental should be around $700 per week. If the rent is way less, it means it is a not a good rental area to invest. If it means the rental more than $700 per week, then it means it is a good rental area to invest.
3. Speak to a banker or mortgage broker on investment property loan packages, which are good for negative gearing.
4. Pick projects that are selling well, renting well and new property to purchase, for the maximum tax depreciation benefits.
5. Pick projects that are new strata title properties, for further tax depreciation benefits, with proportion share of the common property fixtures.
6. Do your homework on project properties for sale, to see if they have any existing defects/post completion maintenance or pest issues, don’t create headaches for yourself or for the tenant.
7. Speak to local property values and other agents on comparable re-sales in the local area, to make sure the property you are buying is not too inflated.
8. Get your conveyancer/solicitor to check the contract well, especially the special conditions, sunset clauses etc.
9. Make sure your investment property loan approval has no expiry and is good for settlement.
10. Make sure you do the pre-settlement inspection to check for defects and other issues.
11. Appoint a good, proactive property manager/leasing agent with good systems in place, who has a qualified list of trades people and networks well with potential tenants.
12. Speak to your tax account and solicitor about having the investment property in your superannuation fund (as a self-managed superannuation fund), for asset protection and tax benefits.