The Victorian State Budget 2017: Winners or Losers
4% Building Allowance and CGT
Most property investors are aware of a 2.5% building allowance, but do you know that there is also a 4% building allowance? Keep reading to see if you’re eligible!
What is a building allowance?
Most commonly known as capital works deduction (Division 43), which is claimable against your assessable income for the expenses incurred in the construction of an investment property. These expenses relate to brick work, concreting and common property items that are not plant and equipment and excavation.
So what does this essentially mean? Well the more expenses that you are allowed to claim, the less your taxable income will be and therefore less income means less tax payable!
Am I eligible for the 4% building allowance?
There are 2 ways to claim a 4% building allowance instead of 2.5%:
- The purchase of a manufacturing building where its core activities fall under s43-150 of the ITAA 1997. Examples of activities included in this category are buildings involved in milling timber, printing, curing meat, refining petroleum, canning or bottling. However, not all industrial buildings will be eligible for the 4% building allowance.
- The purchase of several units which commenced construction after 27th of February 1992 and satisfy the category of ‘short-term traveller accommodation’. Many investors assume that they are entitled to the 4% building allowance just because they own a holiday house and have it furnished. This is incorrect because a holiday home is not a ‘short term traveller accommodation’. These properties tend to have a significant building allowance write-off as they generally have pools, lift access and furnished assets within the properties.
How depreciation affects your tax.
Claiming depreciation on investment or residential property could significantly reduce an individual’s tax burden. All property holders are aware that the value of their property will eventually decline due to ordinary wear and tear of the building structure and components permanently fixed to the property such as electrical cabling, windows and tiles. ATO recognises this and allows those expenses to be claimed as capital works deductions.
The downfall?
Although claiming 4% building allowance to reduce your taxable income and lowering your tax payable sounds like a good idea, we need to consider the downfall of this too. At the time when you decide to sell the property or building, the amount that has been claimed under Division 43 will have to be included back into the value of the property when you calculate your Capital Gains Tax (CGT). This applies to assets acquired after 1st of July 1997.
Calculating depreciation and CGT can be tricky. At A One Accountants, we work with the ATO guidelines to provide you the best advice and solution. Feel free to get in contact with one of our consultants at A One Accountants on 03 8609 1889. If you are also planning on purchasing a property and need assistance with obtaining a loan with the best interest rate, our specialist at A One Loans on 03 8899 7736 will also be able to assist you in that.
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