At the start of every year, it looks as if the Australian Taxation Office (ATO) declares its drive to zero in on a specific segment of taxation.
In 2015, the ATO has stated that it is stepping up its focus on rental property deductions. This could refer to many different kinds of deductions, but a major area of concern for income-generating property owners is tax depreciation deductions.
Some of the mistakes that are usually committed, according to the ATO, include neglecting to use a pro-rata method for deductions on a property that is only being rented for part of a year, or making a claim for deductions on properties that are not really being leased.
A significant number of property owners are willing to adhere to ATO rules, but keeping informed and understanding the various rules can be daunting.
Here are the common mistakes that property owners commit when claiming deductions – and how to avoid them:
1. Making a claim for capital work assets as plant and equipment deductions.
There are two different categories of assets for which you can claim deductions: capital works and plant and equipment. Capital works make up the structural features of a building, such as fixed and removable assets. On the other hand, the value of plant and equipment assets decreases much faster per an effective life established by the ATO. The depreciation for each item is computed correspondingly.
Knowing which assets are suited for which category can be difficult with no guidance from a professional. In some cases, a certain asset may appear to be suited for one category, but the ATO actually pre-determines the category.
A fine example is the TV antennas in homes. It may look like antennas will wear down much faster than other parts of a structure (which is reduced in value over four decades), but the ATO still classifies them as a capital works asset. In other words, if your antennas wear out in only five years, it will still be classified as capital works with deductions at 2.5% over 40 years. You are at risk of being caught by the ATO if you write this asset off at a shorter time period.
2. Assessing an asset’s effective life span by yourself.
This one is somewhat similar from the one above, in the sense that it can be inviting to believe that you can self-assess the effective life of an asset. Your carpet, for example, may appear old and shabby, so you may think it only has a two-year effective life. But every single asset has a specific effective life assigned by the ATO. At present, the effective lifespan of carpets is 10 years.
There is a provision that allows self-assessment of an asset’s effective life, but you are in danger of setting off a review by the ATO. Many accountants believe self-assessing can prompt the ATO to launch a review of your claim, which can put property owners in danger of being found out. You can avoid this kind of trouble by enlisting a professional to help you determine the correct depreciation for your assets.
3. Making a claim for capital improvements as repairs and maintenance.
Claims can be made by property owners on repairs and maintenance made to income-generating properties. Then again, what seems to be repairs and maintenance are actually deemed as capital improvements.
You may avoid getting caught by knowing the distinction between these two terminologies. ‘Repairs’ usually entails restoration, while ‘maintenance’ pertains to work that inhibits deterioration. The ATO says that the two have to pertain to wear and tear brought about by renting the property out.
Meanwhile, capital improvements relate to works that improve the property. Claiming deductions for this must be made at a gradual pace of capital works or as depreciation.
4. Resorting to shortcuts.
Hiring the services of a professional quantity surveyor to create a tax depreciation schedule for you can help you avoid all of the above. You can even claim a tax deduction for the cost of having the schedule created. Then, your property will be paid a visit by qualified depreciation specialists to evaluate the correct assets that you are entitled to make a claim for. They will prepare a depreciation schedule that contains all likely deduction and they will make sure all calculations adhere entirely with ATO rules.
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