As
property prices continue to rise, many investors have considered the option to
purchase an investment property with a friend, family member or business
partner.
Co-owning
property has the immediate benefit of increasing an investor’s purchasing power
while reducing the burden of corresponding expenses. However, many investors
who
co-own property and in particular those considering co-ownership are unaware
that purchasing an investment property with another party can substantially
increase the deductions that can be claimed due to the wear and tear of the
items contained in the property.
To
ensure that depreciation deductions are maximised, a specialist Quantity
Surveyor should be consulted to provide a depreciation schedule based on each
owner’s percentage of ownership for each asset. Often investors do not seek
adequate professional advice and this can lead to depreciation deductions being
claimed incorrectly and in some cases not claimed at all.
It’s
not uncommon for co-owners to make the mistake of calculating depreciation
first and then splitting the deductions based on the ownership percentage.
However, legislation allows co-owners to split an asset’s value by ownership
percentage first, potentially qualifying them for higher depreciation
deductions. As a result co-owners are able to increase their deductions
substantially by writing off plant and equipment items far sooner using methods
such as low-value pooling and immediate write-off.
Low-value
pooling
Low-value
pooling is a method of depreciation which allows an investor with an ownership
interest in an asset of less than $1,000 in value to claim deductions at an
accelerated rate of 18.75 per cent in the year of purchase and 37.5 per cent
each year afterwards. As each investor’s ownership interest may qualify for the
low-value pool, co-ownership expands the number of items that can be claimed at
this higher rate of depreciation.
Immediate
write-off
Legislation allows property investor’s to claim an immediate
write-off for assets with an opening value of $300 or less. In a situation
where ownership is split between one or more parties, the rule allows investors
to claim an immediate write-off to items where an owner’s interest in the asset
is below $300.
Case
study
Let’s
take a look at an example of how the immediate write-off and low-value pooling
rules apply to some of the depreciable assets generally found in the kitchen of
every investment property.
The
table below demonstrates the impact that a split depreciation schedule will
have on qualifying the owners to increased deductions sooner when compared to a
situation where deductions are claimed without performing the split allocation
first.
By
obtaining a split depreciation schedule, the first year claim for each owner
will improve from $365 to $617 and the second year claim will improve from $343
to $519.
The
freestanding gas and electric cooker purchased for $1,862 and the dishwasher
purchased for $1,540 are able to be depreciated using the low-value pool,
greatly increasing the value of deductions.
Using
a split schedule also allows the owners to claim an immediate write-off for the
range hood, as the 50 per cent ownership percentage split will further reduce
the opening cost of this asset to $298 for each owner (less than the $300
threshold set by the ATO).
The
increase in deductions that a split depreciation schedule provides are made
even more significant when all of the assets typically found in an investment
property are included.
A
split depreciation schedule is available in any scenario where an investment
property is co-owned, whether it is for a husband and wife, friends or business
partners.
The
deductions using a split schedule can also be calculated based on any number of
investors and the percentage of ownership each individual has in the assets,
whether it’s for two owners at 60:40 or 1:99, or even four owners at
70:15:10:5.
For
owners with lower percentages of ownership, the low-value pool and immediate
write-off will apply to more assets, increasing deductions earlier. This is
particularly important for investors to understand when entering into a
co-ownership agreement and at the time of purchase. For example, a husband and
wife might choose to align their percentage of ownership so that the higher
income earner holds the greater portion of interest in the assets and therefore
that person will be able to claim a higher portion of the deductions at tax
time.
It’s important to note however that once an investor has requested a split
depreciation schedule, they cannot change their interest in the assets within
the property down the track. Depreciation must always be claimed at the
percentage of ownership split that is outlined on the original schedule from
settlement.
Investors
who would like more information about obtaining a split depreciation schedule
should speak to a specialist Quantity Surveyor for advice. They should also
speak with their Accountant and Financial Advisor before entering into any
co-ownership agreement.
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Chief Executive Officer of BMT
Tax Depreciation.
Bradley joined BMT in 1998 and as such he has substantial
knowledge about property investment supported by expertise in property
depreciation and the construction industry.
Bradley is a regular keynote speaker and presenter covering depreciation
services on television, radio, at conferences and exhibitions Australia-wide.
Please contact 1300 728 726 or visit www.bmtqs.com.au
Sometimes we can be afraid to tell our
landlords the whole honest truth during difficult situations like tough market,
difficult tenants, damaged property, maintenance and improvements needed, rent
arrears, or other escalated circumstances. Often we think we are protecting
them, sometimes we may be afraid of blame - what if they think it’s our fault,
what if they don’t listen, and then there can be a fear over - what if we lose
the management?
