Property tax allowances are a valuable aspect of any property investment due to their ability to enhance an investor's return and produce a better cash flow. However, a high level of expertise is required to ensure that investors obtain maximum allowable entitlements.

1. What are property tax allowances?

Property tax allowances form part of the Income Tax Assessment Act 1997 (ITAA 1997) and provide an opportunity for owners of income producing property to reduce their assessable income. There are a number of property tax allowances available to property owners, investors, and developers, including allowances for building structure and depreciation on plant. Property tax allowances are often simply referred to as tax depreciation.

2. Can property tax allowances increase my investment return

Property tax allowances reduce an investor's assessable income, and by correctly claiming and

maximising these deductions, investors can significantly enhance the after tax return from their investment and generate a healthier cash flow.

3. What allowances are available for my investment?

• Capital Allowances (Division 40 ITAA 1997): Capital allowances are available to owners of plant in both new and second?hand properties that produce assessable income. There is no legal definition of plant, however Income Tax Ruling 2000/ 18 lists over 850 assets that may be depreciable including carpets, air conditioning and light fittings. Depending on the properties specifications, furnishings and sale contract conditions, owners may be eligible to claim between 10% ? 20% of the property's value as depreciable plant.

• Deductions for capital works (Division 43 ITAA 1997): Income producing buildings can be eligible for building allowances, provided construction commenced after 17 July 1985, or in the case of short term travellers accommodation after 20 August 1979. The rate of write?off is either 2.5% p.a. or 4% p.a. dependent upon construction commencement date.

Building allowances are calculated using actual costs of construction or refurbishment, excluding the cost of all plant and non-eligible items e.g. land.

The following table shows an example of the property tax allowances available to property investors when claims are professionally prepared. It is for a residential property with a purchase price of $175,000, which includes a land value assessment of $45,000. Figures are based on acquisition after 30/6/00

Year	Division 40 Allowances	Division 43 Allowances	Total Allowances
1	$1800	$1900	$3700
2	$2500	$1900	$4400
3	$1700	$1900	$3600
4	$1200	$1900	$3100
5	$900	$1900	$2800
6+	$4600	$66400	$71000
Totals	$12700	$75900	$88600

• Additional Claims: Renovations, extensions, repairs, and write-off of demolished works can provide additional opportunities for the investor to increase the deductions and return on their property.

4. How do I submit a claim?

To submit a property tax allowances claim to the Australian Taxation Office (ATO), an investor should request a property tax allowances schedule from a professionally qualified person. Quantity surveyors are stated as appropriately qualified people in Tax Ruling 97125 and their schedule will substantiate an investor's depreciation claim upon lodgement of their tax return with the ATO.

5. How is my claim analysed?

Since all properties are different, a standard approach to depreciation cannot be applied. In order to maximise the deductions available for each specific property and to substantiate the claim to the ATO, a thorough on-site inspection of the premises should be carried out by a quantity surveyor. Following the inspection the quantity surveyor will examine all available drawings and documents, then calculate the appropriate deductions and allowances for the property.

6. When should I obtain a property tax schedule?

The best time is usually as soon as possible after settlement to identify items included in the original purchase price as distinct from any items and expenses incurred during the remaining period of the property ownership. The ability to analyse these costs allows for greater accuracy and maximum returns from the calculation of depreciation and building allowances.

7. How much will this service cost?

Fees are structured to reflect the building type, volume of reports required (multiple units within one complex may attract a discounted fee) and the depth of analysis required (All fees are tax deductible in the year of payment).

8. Do I have to purchase a property tax allowances schedule each year?

A property tax allowances schedule includes a summary of the investor's tax claims for the initial ten years. However, should any of the property's specifications change through refurbishment, extension, or demolition during that time, an additional report should be generated to achieve the maximum allowable deductions.

9. What happens if I am audited?

Should the ATO audit an investor, items within the schedules may need to be defended.

10. What happens when I sell my property?

When a property is sold, there are potentially capital gains tax (CGT) and balancing adjustment issues which must be addressed. CGT may be payable on the land and buildings. Plant is exempt from CGT. However, when selling plant a balancing adjustment must be calculated. This ensures that total depreciation deductions correspond to the actual loss to the taxpayer.

11. Do I need to update my property tax allowances schedule each year?

A property tax allowances schedule includes a summary of the investor's tax claims for the initial ten years. However, should any of the property's specifications change through refurbishment, extension, or demolition during that time, an additional report should be generated to achieve the maximum allowable deductions.

This information is supplied courtesy of N&B Quantity Surveyors - Direct Call 1300 790 790

Return To FAQ Index