The building allowance is a deduction that allows property investors to offset construction costs of their investment property against their tax assessable income.
The deduction is available for:
- buildings or extensions, alterations, or improvements to a building
- alterations and improvements to a leased building, including shop fit outs and leasehold improvements
- structural improvements such as sealed driveways, fences and retaining walls
- earthworks for environmental protection, such as embankments
Deduction Rates and Eligibility
According to the Australian Taxation Office, deduction rates of 2.5 per cent or 4 per cent apply to the construction costs of the capital works, depending on the date construction began, the type of capital works and how they’re used.
People looking to claim the 4 per cent building allowance can do so by:
- Purchasing a residential property where the construction started between July 18, 1985, and September 15, 1987
- Purchasing a property that falls into the category of “short-term traveller accommodation” where construction started after February 27, 1992
- Buying a commercial, industrial, manufacturing or serviced apartment with a construction start date between August 22, 1984, and September 15, 1987
Determining the construction start date can be tricky, as it is defined as the date the footings of the property were poured. Local councils may not always keep records this precise, particularly for older properties. Sometimes working backwards one year from the settlement date of the property can be helpful.
Depreciation Considerations
As part of the building allowance, investors can no longer claim depreciation on plant and equipment – i.e. depreciable assets – in second-hand investment properties, such as kitchen appliances, carpets, and hot water systems.
However, you can still claim on the structure of the building, including the bricks, concrete, windows, and tiling, if the residential property was built after 1987.
As with all deductions, it’s important to get up to date financial advice, and we recommend speaking with your accountant.
If you need more advice about property issues, please contact GLG Legal on: (07) 3161 9555 or email: info@glglegal.com.au