If you purchase or own a rental property, there are some large deductions you are able to claim against the income from this rental property that you might be missing out on. This guide gives a brief explanation of the rules and eligibility for both the Capital Works (construction) and Capital Allowances (depreciating assets) deductions.
Capital Works Deductions
Capital works deductions (also known as Div 43 Deductions from the division of the 1997 Tax Act) are deductions you can claim for construction expenditure on your rental property, structural improvements, extensions and alterations. Examples listed by the ATO are:
- Building construction costs.
- Alterations such as adding or removing internal walls.
- Major renovations to a room.
- Adding a fence.
- Building extensions – adding a garage or patio.
- Structural improvements – gazebo, carport, sealed driveway or retaining wall.
Rules for capital works deductions have changed since being introduced in 1979. As a general rule, if your capital works on your rental property occurred after 15th September 1987, you may still be eligible for a capital works deduction. You can only claim a deduction if the property is being rented or is genuinely available for rent.
If you carried out the work yourself or hired tradespeople to carry it out on your behalf, you should be able to calculate your claim (GQ Tax will help in this process for our clients). To calculate your claim you need the following information:
- Details of the type of construction (house, unit, apartment).
- Date construction commenced.
- Date construction was completed.
- Costs of construction (not the purchase price and not including the cost of land).
- Details of who carried out the construction work.
- Details of the period the property was rented or genuinely available for rent.
If you are purchasing an existing rental property that was constructed after 26th February 1992, the vendor should provide you with details of capital works already claimed and this should allow you to calculate your claim. I have never seen this in practise!
If you purchase a property from a builder who has constructed it on speculation, you do not take into consideration the builder’s profit portion of the purchase price when calculating your capital works deduction.
If you do not have the details of the construction costs to work out your claim yourself, the ATO allows you to obtain a report from an appropriately qualified person:
- Quantity surveyor.
- Clerk of works, such as a project manager for major building projects.
- Supervising architect who approves payments at project stages.
- Builder experienced in estimating construction costs of similar building prohjects.
You can claim the cost of obtaining this report. If you engage a quantity surveyor, they can also provide you with the details needed to claim under the capital allowances rules (see next section).
You do not have to claim deductions for capital works, and any claim you do make reduces the cost base of your property, increasing any eventual capital gain. However, given the current discounts for capital gains tax, in most cases it will make sense to reduce rental income and increase capital gain by claiming your capital works.
Capital Allowances
Rules for capital allowances (Depreciating assets or Div 40) changed significantly on 9th May 2017. From that date you are not allowed to claim for second hand or used depreciation assets. There is one exception to this rule:
- If the property was newly built or substantially renovated.
- Substantial renovations are when the renovations are significant and directly affect most rooms in a building (such as you see in the TV renovation shows).
- And either
- No one resided at the property before you acquired it, or;
- You acquired the property within six months of it being newly built or substantially renovated.
For eligible assets that you have the purchase details for, you can claim over the life of the asset at a rate determined by the ATO or your own rate, but you must keep a record of why you chose a different rate.
A quantity surveyor will be able to provide you with a report detailing pre-existing assets that you can still claim if you do not have these details from the previous owner.
You should agree with the previous owner the apportionment of the purchase price between the building structure and the depreciating assets contained within.
Methods of Claiming
There are two allowed methods for calculating your yearly deduction for capital works and capital allowances, which you choose will depend on your circumstances and GQ Tax will discuss which one will be best for you. The diminishing value method allows higher deductions in the early years and they gradually diminish (hence the name). The prime cost method shares the deduction evenly over the lifetime of the asset.
GQ Tax 