CAN THE ATO SHOW YOU THE MONEY?

If during the past financial year you owned an investment property, either residential or no residential and if you earned assessable income from it then you are entitled to claim a tax deduction for wear and tear or depreciation as it is commonly known.

Over our 25 years in business we have studied a plethora of property types and as a rule of thumb the asset classes that sell at higher yields usually do not offer as significant depreciation deductions as the lower yielding properties.

Most property returns are measured and published as pre tax returns – with very little or no emphasis on what an after tax position might be – something that we have been trying to change, as the numbers can be quite surprising.

To illustrate this, the following tables show the effect depreciation and building allowance deductions can have across a few different tax brackets and the resulting effect that correctly claiming depreciation and building allowances can have in your after tax cash position.

For the purpose of the first example we have used the analysis of a five-year-old commercial office building with a purchase price of $1 million, a land value of $200,000 and an income of $100,000 per annum.

If you claimed no depreciation and building allowances your after tax income at the following tax rates would be:

45% - (highest individual tax rate) = $55,000
30% - (company tax rate) = $70,000
15% - (superannuation fund tax rate) = $85,000

However if you did claim the available deductions your after tax income would be greatly increased as follows:

45% = 72,600 giving a 32% increase in after tax cash
30% = 81,700 giving a 17% increase in after tax cash
15% = 90,900 giving a 7% increase in after tax cash

We would suggest that this is an attractive outcome.

Interestingly enough super funds tend not to bother too much about depreciation and building allowances as their tax rate is seen to be nominal.

They probably should.

In some instances the increase in after tax cash at the 15 per cent tax rate can be 10 per cent.

If approximately 15 per cent of superannuation industry funds are held in property, then this additional 10 per cent in after tax funds would be worth hundreds of millions of dollars each year which if not claimed goes straight to the Government and not to retirees funds for the future.

Residential properties do not offer as much in deductions or yield – however the increase in after tax cash is even better on a percentage basis. This example is a $600,000 high rise strata title apartment with a land value of $75,000 and an income of $500 per week or $26,000 per annum.

If you claimed no depreciation and building allowances, your after tax income at the following tax rates would be:

45% = $14,300
30% = $18,200
15% = $22,100

If you claimed the available deductions your after tax income would be as follows:

45% = $20,300 giving a staggering
42% increase in after tax cash
30% = $22,200 giving a 22% increase in after tax cash
15% = $24,100 giving a 9% increase in after tax cash

Obviously tax deductions will vary between different property types, the age of the property and sometimes by contract clauses at purchase.

But generally speaking if you would like to earn more cash from your investments then you should seriously consider accurately assessing the available deductions from your investment property and have your investments analysed.