In order to take full advantage of any rental income from an investment property, you've got to capitalise on your tax position. The ATO does help, as it allows you to claim a certain amount for depreciation each year for not just the property itself, but the fixtures and fittings contained within. As you may expect, there are a number of rules and regulations, and these seem to be constantly in a state of flux. Recent changes seek to differentiate between new and second-hand assets, and you have to account for these separately by using a different approach. Do you know how to do this correctly?
Old Versus New
Assets that are defined as fixtures and fittings are classified as "Division 40." You now need to segregate these so that you account for any new assets independently. No longer can you "lump" everything together and make one deduction. For second-hand items, you need to wait until you sell the property before you can claim for the total, accumulated value. When you do this, it will also help to reduce the amount of capital gains tax that you might otherwise have had to pay.
Accounting Correctly
When you buy a property for rental purposes it is likely that it will contain a variety of key appliances, such as an air conditioning unit, a fridge or an oven. It may come complete with carpets, curtains and certain other furniture as well, and all of these will be deemed to be second-hand for tax purposes. However, if you need to buy some new furniture (such as a replacement bed and mattress, for example), then you need to treat these separately and will be able to claim depreciation in the same tax year.
Bringing in the Surveyor
As you may know, only certain professional individuals are allowed to make these tax depreciation calculations. Therefore, you will need to bring in a quantity surveyor who can separate all of the Division 40 assets and itemise them very carefully. Once your initial schedule has been tabulated, you'll be able to add any new assets to the list in the future.
Adding It Up
At the end of each tax year, you will be able to calculate the depreciation total for all of the second-hand Division 40 assets. Keep this figure handy, as when you sell the property, you will be able to add the values from each preceding year and come up with a grand total.
More Information
Should you have any questions, make sure that you talk with an expert in tax depreciation matters.