Save $1,000s in Tax Annually - Property Tax Depreciation
In 2004 we bought a house in Ireland for €300,000; in 2009 we immigrated to Australia.
Since then we have tried to sell the property and have been renting it out when we could. The rent doesn’t cover the cost of the mortgage not to mind the other costs involved such as maintenance, insurance, property taxes etc.. Even if we could find a buyer we would have to sell at a massive loss.
Does this sound like you?
For the past 5 years we have been able to write off $13,000 a year against our taxable income due to property tax depreciation.
So how is this done?
First it is important to understand that the Australian Tax System is very different to the Irish system when it comes to investment properties, so if you are basing your knowledge on what you can claim or not on the Irish system you are most likely paying too much Tax.
What is property depreciation ?
The Australian Tax System acknowledges that buildings and their contents wear out over time and eventually need to be replaced, in order to make provision for this future replacement they allow the tax payer to write off a portion of the initial acquisition/construction cost over the life of the asset.
This is what is known as depreciation and is identical in principal to a company claiming depreciation on a motor vehicle over its effective life.
For investment properties two types of depreciation are allowable;
Capital Works (Division 43 of the Income Tax Assessment Act 1997)
Plant and Equipment (Division 40 of the ITAA 1997)
This refers to the initial construction cost of the property at the time of construction and is depreciated over 40 years. The problem that most Irish people have is that they have no records of the construction cost or even if they do, they are incomplete.
In these circumstances the ATO will accept an estimate of the construction cost from a chartered quantity surveyor who is registered with the tax practitioner’s board.
Now the problem I encountered when I approached an Australian Quantity Surveyor to prepare the report for our property in Ireland was that they had little or no knowledge of Irish costs and construction methods, just think about how many Australian houses you have seen that have double glazing, central heating, insulation etc.. They were also unable to arrange an inspection of the property which is required in the vast majority of cases.
Unsatisfied with this situation and being a chartered quantity surveyor I then went through the process of becoming registered with the tax practitioner’s board in order to prepare a tax depreciation report for our own property in Ireland and as a consequence started to offer this service to other Irish people in Australia.
So what does all this mean?
Let’s take an example to illustrate the principal
Fionn owns a 4 bed semi-detached house in Dublin that was constructed in 2005, after an inspection we estimate that it cost €200,000 to build. Based on the ATO’s official exchange rate for 2005 of €0.599: $AUD1, this property cost AUD$333,890 to construct. The depreciation available for the construction cost is applied over 40 years so each year from 2005 to 2045 Fionn can reduce his taxable income by $8,347 each and every year he owns the property. If Fionn’s taxable income is more than $80,000 a year this means an extra $3,255 in his pocket every year before the contents of the property is even taken into account.
Plant and Equipment.
In our example Fionn can also claim depreciation for all the furniture and fittings in the property. These items are all depreciated over different effective lives so for example a refrigerator is depreciated over 12 years whilst the dishwasher would be depreciated over 10 years and so on.
Consequently all of the contents are required to be scheduled independently of each other and this is an area where the onsite inspection becomes invaluable for picking up all the items that you are entitled to claim.
Now once again the problem that most Irish people encounter is when they bought the property they probably intended to live there for life and therefore never kept a receipt for the washing machine or the refrigerator. Once again the in these circumstances the ATO will accept an estimate of the cost from a registered quantity surveyor.
Going back to Fionn’s example it would not be unusual for someone like him to claim a further $2,000 a year in depreciation for the contents so his depreciation report would yield $10,347 or $4,035 in his pocket every year.
Can I claim for my property?
As long as you are a permanent resident (or a citizen) and the property is available for rent you are required by the ATO to report any income or loss on that property.
In our case we actually thought that as the property was difficult to rent (it was empty half the time) and made a loss in Ireland anyway that we wouldn’t bother declaring it in Australia, not realising we were missing out on tax savings in our pocket of $5,000 a year!
So the lesson is if you have properties in Ireland don’t make an assumption based on what you think you can claim, contact a good accountant and ask about your particular circumstances.
It is also advantageous if the accountant is familiar with the Irish Tax System and can submit your Irish tax returns as well, someone like Eadaoin Clancy at Irish Taxation Services for example.
This will save you time and means you can be assured that you are fully tax compliant in both countries. This is important as who knows what a future Irish government will try to extract from the property market. The NPPR being a recent example, where the Irish government will prevent the future sale of the property until the NPPR is paid in full including the late payment fees which can be as much as €7,230.
How much does it cost?
Each scenario is different so the best thing to do is to fill in the enquiry form on our website and we will be in touch.
All our fees are tax deductible and the reduction in taxable income in any year is usually far more than our fee. It is also worth remembering that you do NOT need to get one of these reports every year. Our report will cover the full life of the property and its contents.
Who do I talk to?
We provide free estimates of the likely deductions along with a quotation for the costs involved in preparing the report and carrying out the inspections in Ireland on our website www.ryancc.net
All that is required is that you fill in some basic detail on your property on the online form.