The ATO has issued several warnings recently to investors about claiming deductions on rental properties.

Common errors highlighted by the ATO include claiming deductions for

• properties not actually available for rent.
• Properties only available for rent for part of the year
• Claiming costs as repairs when they should be depreciated as capital improvement
• Claiming capital works incorrectly as plant and equipment

It is very important for investors to have a basic understanding of legislation around depreciation and the terminology used to categorise deductions that can be claimed within a property.

So it is important to recognize the difference between repairs, maintenance and capital improvements.

Here are some key depreciation terms and RealRenta tips for avoiding incorrect claims:

• Capital works deductions or Plant & Equipment Depreciation

Deductions for capital works cover the structural elements of a building, including fixed and irremovable assets, ie roof, walls, built in cupboards, windows, doors etc

Depending on the age, investors can claim capital works deductions at a rate of 2.5% per annum

If a residential property was built before the 15^th September 1987, restrictions will apply.

Investors who own older properties may still be entitled to capital works deductions for any renovations, including those completed by previous owners.

On the other hand, plant and equipment items, depreciate at a much faster rate, ie carpets, hot water systems, air conditioning etc.

The deductions for these items are determined by their quality, not by their age.

To calculate depreciation for plant and equipment, the effective life of each individual asset set by the ATO should be referred to. However, it is not uncommon for investors to self assess depreciation for plant and equipment items.

In doing so, they may put themselves at risk of the following errors

• Categorizing plant & equipment assets as capital works or vice versa
• Capital works items being claimed at higher rates than they should be
• Incorrectly determining a plant & equipment assets effective life based on its condition 

• Repairs and maintenance or Capital Improvements

The ATO has very clear definitions for investors to determine the difference between what is considered a repair, regular maintenance and what is capital improvement.

A repair involves any work completed to fix damage or deterioration of a property.

Maintenance is considered any work which will prevent damage or deterioration.

Capital improvements are work which improves an asset beyond its original condition.

• How to avoid the risks of incorrect claims

Investors can avoid the risks of incorrect claiming by seeking the advice of a Quantity Surveyor.

A Quantity Surveyor will complete a site inspection of the property to identify all of the plant and equipment assets, take measurements and conduct research to find the correct capital works deductions and outline deductions, for plant and equipment assets based on their ascribed individual effective life.

A Tax Depreciation Schedule will outline these deductions for the Investors’ Accountant to process their claim. This will ensure the correct deductions are claimed and minimize the risk for both and Investor and their Accountant.