The concept of earning income from a rental property is relatively straightforward. You purchase the property, rent it to a tenant, and once costs and taxes are deducted, you have an income from the investment. But did you know you can use your investment property to reduce your taxable income, thus decreasing the amount of overall tax you have to pay? This is only possible with the creation of a depreciation schedule, which is a calculation of how much value the property loses annually due to aging and general wear and tear. Have a word with your accountant about how to best go about commissioning a depreciation schedule. There are several steps involved.
One of the first things you'll need to do is arrange for a quantity surveyor to thoroughly inspect your rental property. This can be arranged with the tenant much as a traditional inspection would be, ensuring that due notice is given. You can contact your local branch of the Australian Institute of Quantity Surveyors (AIQS) in order to locate an appropriate quantity surveyor.
A Qualified Professional
The necessity for a quantity surveyor or other qualified professional is mandated under section 28 of the Australian Taxation Office's Tax Ruling 97/25. This is to ensure that an appropriate level of diligence is utilised, resulting in accurate information that allows for the creation of a property depreciation schedule.
Plant and Equipment/Building Allowance
The inspection involves a rigorous assessment of the property's internal and external areas, factoring in both plant and equipment, as well as the building allowance. Plant and equipment covers parts of the property that you would assume to depreciate in value, such as its inner fittings (carpets/flooring, fittings and fixtures, and installed appliances such as an oven). The building allowance covers the depreciation of the building itself, taking its age and overall condition into consideration. Please note that depending on the age of the building, it might be possible to only claim the plant and equipment deduction. This can be the case with older buildings, so check with your accountant if you're unsure.
The Property Depreciation Schedule
The approximate initial cost of construction can be calculated after this inspection (if it was not already known), allowing the precise level of property depreciation (both plant and equipment as well as the building allowance) to be determined. Once this determination has been made by the quantity surveyor, a property depreciation schedule can be created by your accountant. The depreciation schedule states an amount that can be claimed, thus reducing your taxable income, meaning that you pay less tax.
While there is some effort and cost involved in creating a depreciation schedule for your investment property, it's something that can be worthwhile. Talk to your accountant about how best to proceed.