September Accountant Tip – What are capital works deductions?

Each month I will be bringing you an accountant tip; proudly brought to you by GCG Accountants in Cairns:

In our August post we talked about depreciation on Assets also referred to as capital allowance. This time will go into a bit more detail about capital works deductions.

Capital works deductions are available for properties that earn income. Capital works can be claimed on buildings and extensions, improvements to buildings and structural improvements such a sealed driveways or fences and the deduction rates are 2.5% or 4%. This means capital works are expensed over a 25 or 40 year period which is a lot longer than depreciating assets (note that you can only claim a deduction for the capital works on residential rental properties if the property was built/improvements made after 17 July 1985).

Even though the rates are low, if the construction cost of a rental property is $200,000 – at 2.5% it amounts to a tax deduction of $5,000 per annum.

If the actual construction costs are not known, you can engage a Quantity Surveyor to prepare a Quantity Surveyors Report listing the amounts that can be claimed as a tax deduction each year (the cost of having the report prepared is also fully tax deductible).

The one downside worth mentioning is that any capital works deductions claimed will have to be added back when working out the capital gain on the sale of a property to the extent that the amounts are not claimed twice.

In most cases it is worth claiming capital works as you get a tax deduction at your full marginal tax rate but capital gains are only taxed on half the gain if the property is held for more than 12 months (assuming that your property has increased in value and is not in a loss situation).

We are more than happy to assist with any tax related questions in connection with your investment property.

GCG Accountants
53 Anderson Street
Manunda, QLD 4870
(07) 4031 3522