Depreciation on rented property – Tax deductions on Australian tax returns

Jane Cooper 29 November, 2015

Do you own a rental property in Australia? If so, are you claiming all of the tax deductions to which you are entitled?

And … if you are a tax resident of Australia who is subject to Australian tax on your worldwide income and are letting a property elsewhere in the world – for example, in the UK – did you know that you can claim tax deductions on that property too, and negatively gear the overseas property (ie offset the loss against your other assessable income in Australia) if you turn the rental surplus into a loss after claiming your tax deductions?

Tax Depreciation in Australia
Just as you can claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of an investment property against your taxable income.

There are two types of allowances available:

  • Depreciation of plant and equipment, and
  • Building allowance

Plant and equipment refers to items within the building such as ovens, dishwashers, carpet, light fittings, blinds etc.

Building allowance refers to construction costs of the building itself, such as concrete and brickwork.

Depreciation represents the writing off of these costs over time, and can be offset against your assessable income.

The amount you can claim as a tax deduction – and hence reduce your tax bill – will vary from property to property, as the construction costs and contents of each property will vary.

A Depreciation Calculator for properties in Australia which can help you get a feel for the possible deductions available to you is here.

Note that if your residential property was built after July 1985 you will be able to claim the building allowance and depreciation of plant and equipment.

If construction on your property commenced prior to this date you can only claim depreciation on plant and equipment (i.e. carpet, blinds, ovens etc). But it is still likely to be worthwhile claiming the depreciation deduction to reduce your taxable income.

Importantly, if you are a tax resident of Australia and are subject to tax in Australia on your worldwide income you can claim depreciation on rental property that you own outside Australia.

Tax Depreciation Reports
Quantifying the available tax deduction for depreciation of plant and machinery, and for the building allowance is not an easy exercise – which is why specialist firms of Quantity Surveyors are usually instructed to prepare a Tax Depreciation Report.

GM Tax is pleased to work with Washington Brown – not least because they are highly experienced, are reasonably priced, and (importantly for many of our clients) because they can prepare tax depreciation reports in respect of properties that are being let in the UK by our clients who are tax resident in Australia.

The cost of having a tax depreciation schedule prepared is also 100% tax deductible on your Australian tax return.

It is also worth noting that you do not need a new tax depreciation report each year. The reports quantify the available tax deduction for many years, so it is likely to have relevance to your Australian tax returns for so long a period as you are subject to tax in Australia on your worldwide income, and retain ownership of your rental property.

Amending Australian Income Tax Returns for Earlier Years
We are often asked to act as tax advisor by individuals who have not claimed depreciation that is available on a let property on already lodged Australian tax returns.

In such circumstances all is not lost!

The Australian Taxation Office permits amendments to be lodged for already submitted tax returns for (usually) at least the last 2 tax years, and sometimes longer – GM Tax has been very successful in securing some substantial tax repayments for new clients who have not claimed depreciation on their rental properties in the past.

If you are subject to tax in Australia and own a rental property – whether it is in Australia, or the United Kingdom, or anywhere in the world for that matter we recommend that you explore the cost of the report and what might be claimed as a tax deduction to enhance your tax position.

A free no obligation quote for having a tax depreciation report can be obtained by completing the form at this webpage.

To discuss how GM Tax can help with the preparation of your Australian tax returns – including amendments to tax returns for earlier years where a depreciation deduction to which you are entitled has not been claimed – please complete the enquiry form on this page.

We will be pleased to have a no obligation discussion, after which we can send a fixed fee proposal to you.