As property prices continue to rise, purchasing in a centrally-located or sought-after area is getting out of reach for the average working millennial. Instead, many are opting to rent rather than buy as it means not having to compromise their inner city or beach side lifestyle. But for those who are still eager to enter the market, there is a way to get the best of both worlds.
Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.
Seasoned property investors know all about this one. In fact, some will take depreciation into account before purchasing their investment. But it’s not just for the pros. Anyone who purchases a property for income-producing purposes is entitled to depreciate both the items within the building and the cost of the building itself – against their assessable income.
Every year, thousands of dollars go unclaimed by property investors who are none the wiser. All it usually takes is a qualified quantity surveyor to inspect your home and prepare a report for your accountant. The savings can be substantial.
What is property depreciation?
There are two types of allowances available:
Plant and Equipment refers to items within the building like ovens, dishwashers, carpets and blinds etc.
Building Allowance refers to construction costs of the building itself, such as concrete and brickwork. Both these costs can be offset against your assessable income.
Depreciation is known as a “non-cash deduction” because it’s a deduction that you don’t have to pay for on an ongoing basis – the deductions are in-built within the purchase price of your property. All other deductions, such as interest, levies, will cost you and require payment on an ongoing basis.
Is my property too old to claim depreciation?
The simple answer is no. If your residential property was built after July 1985 you will be able to claim both Building Allowance and Plant and Equipment. If construction on your property commenced prior to this date, you can only claim depreciation on Plant and Equipment. But it will still be worthwhile.
Commercial and industrial properties are subject to varying cut off dates.
Who should calculate the depreciation?
If your residential property was built after 1985 your accountant is not allowed to estimate the construction costs. Similarly, real estate agents, property managers and valuers are not allowed to make this estimate.
Tax Ruling 97/25 issue by the Australian Taxation Office (ATO) has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown.
Whereas accountants can offer advice around other aspects of tax depreciation, construction costs and property depreciation are technical in their own right. quantity surveyors are specialists in the accurate measurement of construction costs with a view to maximizing a client’s financial position in relation to their property assets.
Will my property need to be inspected?
The Australian Institute of Quantity Surveyors (AIQS) Code of Practice stipulates that site inspections are necessary to satisfy ATO requirements.
A quantity surveyor will ensure all depreciable items are noted and photographed. This ensures you won’t miss out on any deductions. The documentation can then be used as evidence in the event of an audit.
The best time to get an inspection of your property is immediately after settlement and hopefully just before the tenant has moved in.
However, even if you bought the property three years ago, you can I still make a claim in most circumstances. Your accountant can amend your previous tax returns up to two years back. There are some exceptions, so contact your tax agent or the ATO for clarification.
Can I still claim if my property is renovated?
Yes. The Quantity surveyor will need to know how much you spent on renovations. This is an ATO obligation. If the previous owner completed the renovations, you are still entitled to claim depreciation. In either case, where the cost of renovation is unknown, a Quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation.
How much will my depreciation schedule cost?
The cost of preparing a tax depreciation schedule varies depending upon the type of property you’ve purchased, location, size and numerous other factors. Generally, the leading quantity surveying companies offer a money back guarantee to save you twice your fee in the first year or they give you the report for free.
So, you have nothing to lose – and deductions to gain! Quantity surveyors’ fees are 100% tax deductible.
– Prepared by Washington Brown, Quantity surveyors
Zero percent financing sounds great, but as with so many things, there are often strings hidden in the deal that could end up costing you money.
Think about it: The car financing company isn’t really lending you money for free. It would go out of business pretty quick if that were the case.
The zero percent deal is usually offered through the manufacturer’s finance arm, and is a marketing strategy. Even so, when you are paying no interest, the company has more of an incentive to make up the lost profit in other areas. In other words, you may get the sweetheart zero percent financing deal, but find it difficult, or even impossible, to negotiate a better price and the financing is often limited to a particular spec and possibly even a colour. Great, if it is what you really wanted.
These rates are also generally reserved for customers with nearly flawless credit. Your average buyer may well find that once they get in the door, they don’t qualify. But at that point, the dealer already has them on the hook.
On most occasions, it is almost always cheaper to negotiate a great discount on the price of a new car, and arrange the most affordable independent finance available in the market place.
There are other hidden catches sometimes tied to zero percent deals that could end up costing you money, including fixed servicing requirements, along with insurance and warranty clauses. Make sure you read and understand all the fine print before signing on the dotted line.
Simply put: buyer beware.
As a general rule, you will probably be better off negotiating the best deal at the dealership and then securing your own financing. A simple rule of thumb is to compartmentalise your car buying experience.
Give us a call on 1300 252 088 to discuss your car financing requirements.
Small business owners often don’t have the funds available to purchase business assets outright without impacting their cash flow. Yet ownership can be attractive. So should you lease or buy?
Financing options
You may not always have timely access to cash to buy business assets outright, or you may have more productive uses for your funds. There’s a range of options when it comes to buying and financing business assets.
Equipment loans: If you want to immediately own a business asset such as key plant or equipment, then you might opt to take out an equipment loan. The interest payable on the loan generally attracts a tax deduction.
HP agreement: A hire purchase (HP) agreement may be more suitable if you ultimately want to own the asset, but don’t want to tie up available cash. With HP agreements, the bank or financier purchases the equipment and initially hires it to your business for an agreed period of time.
Finance lease: A finance lease can also ultimately result in ownership of the asset, whereby the bank initially owns the asset and agrees to lease it to you for a prescribed period. The rental payments on a finance lease can be structured with a residual value balance, allowing you an option to purchase at the end of the agreement. This has the advantage of making the initial cash flows more manageable.
Or you may simply choose to lease an asset for an agreed term, which can have its own advantages, such as flexibility and certainty of cash flow.
Should you buy your premises?
Potentially one of the most significant decisions facing a small business is whether to buy or lease business space. Owning commercial real estate can be appealing; the premises may become a significant asset for your business, bringing potential for capital growth whilst negating the need to pay rent.
Owning your premises may also bring a welcome feeling of security. It also means you have control over how the space is laid and fitted out.
Purchasing your premises may also allow you to borrow against the asset in order to fund business expansion, while in some circumstances there may be advantages to purchasing business premises as part of your superannuation fund.
Disadvantages to ownership
One of the hurdles to purchasing of business space is the large cash injection that is typically required. The lender or mortgage company may also require a personal guarantee, which could put your home at risk in the event of business failure.
Naturally this could place additional pressure on your business and its cash flow; and not only at the point of purchase, since there will likely be fit-out and set-up costs to account for.
Cash flow is also less certain with ownership, as borrowing costs may be variable. The owner also retains responsibility for other variable costs such as rates and repairs.
Ownership may also present reduced flexibility if your business needs to relocate, upsize or downsize. If your business is specialised in its nature or operations, it may also be difficult to quickly sell a niche asset.
Finally, the injection of cash into a premises purchase can have an opportunity cost; it could reduce the potential for investment in other productive parts of your business. Small business owners need to question whether they should focus on their core business competencies instead of real estate ownership and fit-out.
For younger businesses and start-ups in particular, flexibility gained through a shorter-term lease may be preferable until the business is established.
Tax and structure
It is vital to understand all of the different tax and ownership structure implications before making financial decisions. Therefore you should consider engaging a licensed taxation accountant or financial planner to advise you where appropriate.
For example, the small business owner who purchases a business asset may be able to claim depreciation of fixtures and fittings, but when leasing assets the rental cost may instead attract a tax deduction in the financial year to which the cost relates.
Other assets
Different purchase or financing strategies may be appropriate for various business asset classes. For example, where the employees of a business use cars, a novated lease agreement between the business owner, employer and financier may offer flexibility for the employee, as well as reduce administration costs.
On the other hand, in the fast-moving world of information technology, a small business may choose to lease assets for shorter time periods, to reduce the risk of obsolescence since some IT equipment dates quickly.
Cash flow needs
The decision whether to rent or buy business assets will ultimately be decided by the type of business you operate and which method provides opportunities to optimise your cash flow.
Consider how and when your business assets will generate cash for you. As a rule of thumb, it does not make sense to finance an asset for a term longer than its useful economic life.
Also consider your cash flow. Do you have predictable and steadily consistent cash flow, or is your business subject to wide seasonal variations? Ideally you need to prepare detailed forecasts to compare scenarios and plan accordingly.
Choosing how and when to purchase assets are key financial decisions and expert advice should be thought.
By Peter Wargent MYOB