WINNING! The Off-the-Plan Advantage of Tax Depreciation

Most Australian investors are familiar with the benefit of tax depreciation, however our clients at GPFG are enjoying maximised deductions when buying off-the-plan investment properties. This also includes overseas purchases for builds in Bali and Thailand.

Off-the-plan properties, being brand new, hold a distinctive advantage when it comes to tax depreciation. With everything in the property being unused and new, the depreciation deductions available in the initial years can be significant.

Below we’ll break it down for everyone to understand how Australian investors can maximise their tax depreciation deductions by talking to our qualified tax advisors and having accurate Depreciation Schedules for property investments.

Depreciation is the decrease in value of an asset over time due to the ageing as well as the wear and tear. For property investors, they can claim deductions for the diminishing value of their investment property and its fixtures over a period. These deductions can lead to substantial savings on an investor’s annual tax bill and increase your cash flow starting from the first year that the property is completed.

There are two main categories of claims:

- Capital Works Deductions. These are anything related to the building's structure, including walls, floors, roofs, and other static elements. For new properties, investors can claim 2.5% of these construction costs per year over a 40-year period.

- Plant and Equipment Deductions. These pertain to removable or mechanical assets within the property, such as appliances, carpets, blinds, and other fixtures. The depreciation rate varies for each item, with many having a life span of fewer than 40 years.

When claiming tax depreciation, obtaining a professionally prepared Depreciation Schedule is crucial. This document, usually prepared by a quantity surveyor, outlines the depreciation claims available over the property's life. This ensures accurate identification and allocation of depreciation deductions for both the building structure and plant and equipment assets within the property.

At GPFG we work with quantity surveyors to provide Depreciation Schedules for our clients on their investments, and this also includes overseas properties in Thailand and Bali. Our clients can also work with our tax advisors to claim their maximum entitlements and don't miss out on any potential deductions.

The Off-The-Plan Advantage

When you buy off-the-plan properties, you not only have the cost saving benefits of design and build, as those are done by the developer, but the tax depreciation savings are boosted for a number of reasons.

Tax depreciation benefits of buying off-the-plan properties:

- Higher depreciation rates. Off-the-plan properties typically include brand-new fixtures, fittings, and building components, which can have higher depreciation rates compared to established properties. This means investors can claim higher deductions for the decline in value of these assets over time.

- More plant and equipment deductions. Everything within the property is brand new, from the appliances, carpets, air conditioning units, and other plant and equipment assets. All of these items can be included in your deductions.

- Longer depreciation period. By purchasing a property before its completion, investors can benefit from a longer depreciation period. The depreciation of both the building structure (capital works deduction) and plant and equipment assets can be claimed over a longer period, potentially increasing the overall deductions claimed.

- Accurate Depreciation Schedules. Engaging a quantity surveyor when buying off-the-plan ensures the preparation of a comprehensive depreciation schedule. This schedule provides a detailed breakdown of all eligible assets and their respective depreciation values, enabling investors to maximise their claims. At GPFG, we have quantity su

- Cash Flow Boost: The higher depreciation deductions from off-the-plan properties can result in increased tax benefits and potentially reduce taxable income, providing a cash flow boost for property investors.

“All of these benefits are accurately depicted in our Depreciation Schedules, showing our clients how they can increase their ROI in Year 1 and beyond,” says Chad Egan, CEO of GPFG.

Let's consider an investor who purchases an off-the-plan property with us, worth $250,000. This could be a whole property or a fraction of one of our larger luxury units. Here's how tax depreciation might work in this scenario.

- Assuming construction costs amount to $200,000:

For Capital Works Deductions, the investor can claim 2.5% of $200,000 every year, amounting to $5,000 annually for 40 years.

- Assuming fixtures and fittings are worth $30,000:

The Plant and Equipment Deductions, will depend on the individual assets' depreciation rates. However, given that many items within this category depreciate faster than the building structure, it's possible for our investor to claim upwards of $2,000 annually for the initial years.

In the first year alone, the combined depreciation might allow our investor to claim deductions worth $7,000 or more. With an accurate Depreciation Schedule, the investor can see a cumulative benefit, enhancing the property's overall ROI.

For Australian investors, understanding tax depreciation especially for brand new and upcoming, off-the-plan properties, can mean the difference between a good investment and a great one. By claiming the full range of available deductions, you can minimise your tax expense and start maximising your returns as soon as the property is finished.

As with any tax-related matter, it's always recommended to seek advice from a tax professional or accountant to ensure you're maximising your benefits. We have qualified tax specialists in our network, who are happy to work with you on your investment and tailored needs.