Whether you’re a first-time property investor, or a seasoned property investor with an extensive portfolio, staying on top of capital works deductions is essential.
If you’re a property owner or an investor, you may be eligible to claim capital works deductions. These deductions are tax breaks that help property owners to offset the cost of repairs and improvements to their property portfolio in Australia.
In this article, we’ll look at how capital works deductions work, which assets are considered deductions, who can claim them, and provide insights into how you can navigate the tricky world of capital works deduction.
Is capital works deduction the same as depreciation?
In a word – no.
Capital works deductions are not the same as depreciation. Depreciation is an accounting method that is used to spread the cost of a fixed asset throughout its useful life. Capital works deductions on the other hand are available for certain types of construction and renovation work.
Which assets are considered capital works?
There are a range of different assets that are classified as capital works in Australia. The nature of the property (residential or commercial) will dictate what you are eligible to claim as capital works.
Capital works assets in residential properties
- Swimming pools
- Sinks, drains, and basins
- Baths and toilets
- Electrical wiring
- Fences and retaining walls
Capital works assets in commercial properties
- Ventilation and heating systems (HVAC)
- Fire safety upgrades
- Upgrading building facades
- Adding new floors
- Extensions on an existing area of the building
- Sinks, drains, and basins
- Bathrooms and toilets
- Flooring upgrades
- Kitchen upgrades
Not all improvements to residential and commercial buildings will qualify for deductions. For instance, cosmetic upgrades and routine maintenance expenses are not deemed eligible. As such, it’s important to speak to a quantity surveyor before proceeding with works so that you can comprehensively understand your tax obligations.
Who can claim capital works dedications?
In order to claim capital works deductions on a commercial or residential property, you need to have owned or leased the property on which the work was conducted at some point during the period where the work was undertaken. You will also need to have incurred expenses for construction, renovation, or installation when the work occurred.
If you are claiming the deductions for a rental property, then you must be the owner of the property. Tenants who rent the building cannot claim capital works deductions.
What is the difference between capital allowances and capital works?
Capital allowances and capital works are two different ways of providing tax relief for businesses on investments in upgrades and equipment.
In Australia, capital allowances and capital works are represented under two separate codes by the Australian Taxation Office (ATO).
- Division 40: Capital allowances cover things such as furniture, computers, desks, monitors, hardware.
- Division 43: Capital works cover items such as fittings, structural upgrades, building upgrades, and all other items outlined above.
Capital allowances enable businesses to deduct the cost of business investments from their taxable profiles, while capital works deductions are made against the value of the property itself. There are different rates of relief for each type of expenditure, and businesses need to carefully classify these expenses accordingly.
In general, capital allowances provide a more substantial tax relief than capital works deductions, but they require more effort and know-how to claim. Capital works deductions may be easy to claim, but the level of tax relief that they provide is substantially less.
How are capital works deductions calculated?
There are a number of different ways that you can claim capital works deductions in Australia. The most common method is to use the depreciation rates that are set by the Australian Taxation Office (ATO).
The capital works deductions set by the ATO calculate the amount of deductions that can be claimed for capital works over the course of their useful life. The ATO will set different rates for different types of assets, which is why it is important to work with a qualified specialist who knows which rates apply to your asset before you begin calculating your deduction.
The second way that you can calculate capital works in Australia is to use the diminishing value method. This method takes into account the assumption that an asset will lose its value over time as it is used and therefore depreciated.
To calculate the deduction applicable for the diminishing value method, you will need to estimate the asset’s expected resale value at the end of its useful life. You then deduct a percentage of this value from the cost of the asset each year.
Finally, you can also calculate capital works deductions using the prime cost method. This method is similar to the diminishing value method; however, it does not take into account the expected resale value of an asset. Using the prime cost method, you deduct a fixed percentage of the asset’s cost each year until the full amount has been deducted.
Whichever method you choose to use, it’s important that you keep an accurate record of all costs associated with the asset in order to claim the deduction of your tax return.
Whether you own a property portfolio consisting of residential and commercial investments, or you own a single residential property, it’s important to be aware of the different deductions that are available to you. The capital works deduction method is an effective way to claim applicable expenses and reduce your taxable income.
Get in touch with the Property Returns team to find out how you can save money this tax season with a capital works deduction plan.