The ATO rewards you for making houses into homes for your renters.
Being a property owner comes with risks, but also reaps rewards. I’m not just talking holiday gift certificates and bottles of wine from your tenants. You can actually claim a tax deduction for the maintenance and care you put into your property that you work so hard on.
The Australian Tax Office offers property investors the capital works tax deduction to claim. Think of this as a reward for all the blood, sweat and tears you put into your investment. Now, let’s see how much it’s worth, how to claim it, and what it applies to.
What is a capital works deduction?
The capital works deduction, aka the “building allowance”, are one and the same. Whatever you’d prefer to call it, it’s applied to your tax return as a deduction, as well as a reduction of the cost basis on the property or building in question. It will offset the cost of any construction you’ve done that assists with bringing in rental income.
Updates to your property that could apply to this tax deduction include, but aren’t limited to:
- Building expansions
- Building alterations
- Concrete and brickwork
- Property items (excluding equipment and plant, meaning certain utility items)
- Sealed driveways
- Retaining walls
- Other structural improvements
How much is the capital works deduction worth on your tax return?
This tax deduction is worth as little as 2.5% and as much as 4% of the cost base of your property. This may not seem like much. That is, until you consider the total cost of building of a property. It can really add up. On top of that, this is considered a ‘non-cash deduction’, meaning that you don’t need to pony up the money in order to claim it on your tax return. According to ATO regulations, you’ve already forked up the cash when you initially bought the property.
Let’s take a look at an example.
The building you purchased was built for $400,000. Aside from the $35,000 cost of plant and equipment (which, as mentioned before, is excluded), you’re left with a claim of $365,000. This could mean one of two things for you:
- At a 2.5% rate of depreciation, you’d be left with an annual capital works deduction of $9,125.00.
- At a 4% rate of depreciation, you’d total out to an annual capital works deduction of $14,600.00.
On the other hand, if the original owner took a capital works deduction before you purchased the property, this will reduce the cost base of the property you own and may limit your opportunity to claim this deduction.
That being said, I think we know what your next question is.
How can one claim the full 4% building allowance on their property?
While 2.5% is the standard for most property investors, it is possible to claim the allowable 4% under certain circumstances. Here’s how.
- You own a building which specializes in industrial activities which qualify under Section 43-150 of the ITAA 1997. These activities consist of the following:
- Milling timber
- Curing meats
- Refining petroleum
It’s important to understand that not ALL industrial buildings qualify for 4%. You must specifically meet the regulations set forth by Section 43-150.
- You’ve invested in multiple units that can be defined as ‘short-term traveller accommodations’, as described fully in ATO ID 2003/513. In general, the ATO’s meaning of ‘short term’ is that you provide accommodation to an individual for less than 28 consecutive days on your premises.
Remember, you should never base an investment solely on a high tax deduction. Laws change all the time and you wouldn’t want to get stuck with a property you resent and several empty pockets. However, if the shoe already fits, then wear it. The ATO established the capital works tax deduction to ease the piggy banks of property investors. Take advantage of this by doing your research and claiming all you’re entitled to on your tax return this year!
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