This week we focus on a hidden gem – capital works on investment properties and making best use of this often underutilized and misunderstood tax benefit.

Capital works deductions are income tax deductions an investor can claim for wear and tear that occurs on a building’s structure and items which are permanently fixed to the property. This will include structural improvements that you have made as a result of a renovation for example. And by the way, these can continue to be claimed even if the work and the cost was completed by the previous owner!

Generally speaking these capital works deductions make up between 85 – 90% of the total depreciation claim. To maximise your benefit, the best method is to have a depreciation schedule prepared by a quantity surveyor. We can help you there if you need a referral.

We have noticed that many investment property owners are NOT maximising these deductions because they are unaware of this or just not getting around to doing it.

Remember, you can only claim a deduction for those periods during the year you used your rental property for income-producing purposes. You can’t claim for the period you use the property for personal usage.

Let’s look at a worked example and how it works in practice.

On 1 July 2020, I purchased a rental property for $600,000 and immediately rented it out. I sought a report from a quantity surveyor stating:

• Construction of the property commenced in February 2003.
• The property is a residential townhouse.
• Construction was completed in November 2003.
• The townhouse was built by a developer.
• The estimated cost of constructing the townhouse was $200,000.

I claimed a capital works deduction in my 2020 tax return for the rental property based on the estimate of the construction costs I have received from the quantity surveyor. When I am doing my tax return in July 2021 I will be  claiming 2.5% of the total construction costs as this property was built after 15 September 1987 (when capital gains tax was introduced).

My annual capital works deduction will be calculated as follows:
$200,000 × 2.5%= $5,000 assuming my place was available for rent for the entire period. My marginal tax rate will determine how much I get back. If I am earning over $120,000 per annum, my tax rate will be 39% (with 2% medicare levy) meaning I will receive $1,950 back each and every year I hold the property and continue to offer it for rental.

As a general rule, I can claim a capital works deduction for the cost of construction or renovation for 40 years from the date the construction was completed.

Capital works expenses you incur form part of the cost base of your property for capital gains tax purposes. If you claim a capital works deduction, you will need to take this into account when you work out your capital gain or loss, but that’s another story for another day.

Hopefully this article provides you with some insight into this often over looked deduction. If you would like to learn more about this feel free to contact us directly via www.futuregen.solutions