Property Investing in Australia

Australians love property especially residential property which offers Australians the security of ‘bricks and mortar’ as compared to the fluctuating values of shares and commodities. This is one of the reasons most banks are willing to lend up to 95% of the value of a residential property in contrast to all other investment options.

Residential homes are a stable and passive asset requiring very little management.  Unlike other investment strategies, you can easily increase its value by adding assets such as air conditioners, car ports, or renovating, painting, new carpets or window coverings all of which can be depreciated by means of a quantity surveyors report, which is also known as a tax depreciation report, a tax depreciation schedule or a property depreciation report.

Everyone needs a home to live in and as our population grows, the demand for property will continue. Owning a piece of real estate in Australia will give you greater flexibility, you can occupy the premises as your principal place of residence.  Or you can rent the property out and draw an income, potentially reducing your taxable income at the same time. Moreover, through rental property depreciation, also known as investment property depreciation you can reduce your costs significantly.

Historically, the median house price in Australia has doubled every seven to ten years.  As the Australian population continues to grow, the demand for housing will invariably continue to increase.  Historically, this forms a trend line of continued capital growth in Australia.

For most Australians, it is familiar territory.  Therefore, it is easier to develop a successful strategy for building a portfolio of investment properties than it is to negotiate the volatility and complex nature of the share market.

Negative Gearing

Negative gearing for an investment property, occurs when the annual interest payable on the loan used to purchase the property, exceeds the annual rental income the property generates.

Simply, a Negative Gearing example is when:

  1. You borrow the money, that you need, from a bank to purchase a rental property
  2. The interest on the loan and other costs you incur are more than the rental income you receive from the investment (in other words you make a cash loss), and
  3. This cash loss is offset against income from your salary, thus reducing your taxable income.

So the tax man and the rental income pays for your investment property!

In Australia, negative gearing, for decades, has made it easier for investors to accumulate properties and let them grow in value over time.

Negative gearing has been around for a long time across all types of business and income earning activity. Some of the expenses incurred through the operation of that business are tax deductable on income assessment.

When applied to property investment, negative gearing takes deductable income even further as the property owner can depreciate the assets, for wear and tear, this is called rental property depreciation or investment property depreciation both terms, in fact, mean the same. For the depreciation to commence a tax depreciation specialist is required (usually a quantity surveyor) to analyse the property and prepare a;

  1. Tax depreciation schedule
  2. Tax depreciation report
  3. Quantity surveyors report
  4. Property depreciation report which in fact all refer to the same thing.

Investment Property Depreciation

One of the most confusing areas of property investment is the investment property depreciation. What happens here, is that most investors interpret the legislation incorrectly, which results in a loss of hundreds of thousands of dollars each year in unclaimed benefits and deductions.

The Australian Taxation Office guide to rental property depreciation states that under income tax law, you are allowed to claim deductions for expenses incurred in earning assessable income. It goes on to state that the cost of capital assets used in producing assessable income can be written off over time as tax depreciation. However, the handbook fails to provide basic and adequate information to assist average investors in enabling them to self-assess their properties, or understand the basic principles of the tax depreciation act. To the majority of investors this area remains very ambiguous.

Likewise, tax depreciation is a benefit to the purchaser – not the builder, developer or selling agent – and is calculated on the purchase price of the property. Although people refer to it as depreciation, there are actually two distinct types of investment property depreciation “allowance”: (a) Capital Works Allowance, e.g. Building Allowance and (b) Depreciation Allowance on Plant & Articles, e.g. Plant & Equipment.

In fact, over the past few years, rental property depreciation has come into its own to the extent that many companies are beginning to specialise in this area and to provide for clients a tax depreciation schedule or a tax depreciation report on their investment property. This has increased to the extent that it is necessary to thoroughly assess the market and the services that are being offered and fees charged, providing the client with a brief insight and knowledge which will assist them in their choice of company to complete their tax depreciation report service.

By claiming the maximum legitimate tax deductions on their investment property at a reasonable fee, Property Returns is one of the few tax depreciation companies providing investment property depreciation reports at a reasonable cost.

A Quantity Surveyors Report

Only a tax depreciation specialist such as Property Returns can be relied on to maintain detailed knowledge of up to date building codes, construction costs and ATO Tax Rulings relating to rental property depreciation. Ultimately, providing you the investor, with a complete analysis of your property.

The advantage of using a tax depreciation specialist, as explained above, is that specialist knowledge is put to work for the benefit of the purchaser or owner of the investment property. It is worth remembering however, that not all quantity surveyors specialise in tax depreciation or the preparation of a quantity surveyors report (tax depreciation schedule).

Inspecting Your Property

Having a physical inspection of your property allows our qualified inspectors to ensure we record all legitimate entitlements within your report. As a property investment depreciation company our inspectors have the expertise to ensure your tax depreciation report contains all depreciable assets and legitimate costings.

As one of Australia’s largest property depreciation reporting companies with expert tax depreciation professionals leading the team Property Returns are best positioned to deliver an affordable, timely and reliable tax depreciation report.

Our inspection is comprehensive and identifies all relevant depreciable items that can be claimed in your tax depreciation report.

A Property Returns Tax Depreciation Report

Our tax depreciation report contains;

  1. The total life of the property 40years
  2. Low-value pooling is used to accelerate deductions, in the tax depreciation report
  3. The effective life of each asset is displayed and a total shown for the capital works deduction
  4. A pro-rata calculation is used when a residential property is acquired part way through a financial year or rented for only a percentage of the year ensuring that deductions are accurately maximised
  5. Grouping of assets in designated areas shows a calculation of all assets depreciated at the same percentage rate grouped and totalled
  6. Split reports are available when a residential property is owned by several investors, resulting in higher deductions earlier in the life of the asset
  7. For owners who have lived in the property, our program reverts back to the ATO’s original deductions saving the owner thousands of dollars by reducing their claim in the early years, Property Returns is the only Australian company which does this in their property depreciation schedule.

Maximizing your return on property

With a Property Returns tax depreciation schedule you will;

  1. Claim the maximum legitimate deductions available
  2. Increase the yield on your property investments
  3. Pay the minimum amount of tax (negative gearing)

Reporting

Property Returns is the only Australian company which utilizes its own investment property depreciation program, a total integrated tax depreciation system designed specifically to provide the property investor with a current up to date Tax Depreciation Schedule (tax depreciation report) which identifies the maximum depreciation available on rental property depreciation.

Although the rules, regulations and interpretations affecting tax depreciation on property are probably the most difficult and confusing piece of legislation ever written, our system offers clients the most up to date reporting in Australia combining local building codes and construction costs, building measurements, construction analysis, plant recognition and individual asset costing.

Property Returns uses third party information in its technology which includes and is not limited to, Government building costs and indices, and guidelines on depreciation and rental property deductions set forth by the Australian Taxation Office (ATO). Property Returns uses recognized standard industry construction costings on buildings and plant, and are of a general nature.

Buyers Beware

Over the last year Property Returns has been involved in many exciting projects and have informed groups of investors in Brisbane, Sydney, Melbourne, Perth and Darwin on property tax related topics. I am happy to say that most property investors are analysing the market and the product before committing themselves.

There are many computer programmes and books written on how to analyse properties and how to grow rich through property. If that’s your goal, hopefully you will – it’s not rocket science – but caution and careful analysis is always warranted, as with any investment. It certainly pays to be aware of the full range of depreciation allowances available from your property.

It’s important to note that the Professional Property Allowance specialists who provide a tax depreciation schedule on your investment property are analysing the purchased property for the purchase price at the date of settlement. If you find the need to renovate or remove some structures, then you’ve actually changed what you have originally purchased. And this may cost you dearly in depreciation allowances. It pays to have your property analysed by a professional who is experienced in providing tax depreciation schedules (tax depreciation reports) before committing to additional capital expenditure.

A final reminder; one should not purchase properties solely for the rental property depreciation benefits. It’s amazing how many people forget this very basic rule. Capital gains and cash flow should be the main goals, as virtually any investment property will provide substantial tax benefits to its owner.