Depreciation is a crucial yet often misunderstood aspect of tax planning. Missteps in advising clients can lead to missed deductions and compliance risks. Here are some common errors accountants and their clients encounter, along with insights to avoid them.

1. Applying Individual Tax Rules to Company Structures

The 2017 legislation changes affected individual taxpayers and family trusts by disallowing claims on second-hand assets in income-producing properties.

Error: Applying these rules to properties held in a company structure, where depreciation claims remain valid for both Division 43 (building) and Division 40 (plant and equipment).

Solution: Recognize that properties owned by companies can still claim full depreciation entitlements, ensuring accurate and maximized tax deductions.

2. Overlooking Depreciation for SMSF Properties

Self-managed superannuation funds (SMSFs) often miss claiming allowable depreciation deductions, resulting in unnecessary tax payments.

Error: Failing to include depreciation in SMSF tax strategies.

Solution: Account for all depreciation deductions on income-producing properties held by SMSFs to optimize tax savings.

3. Dismissing Older Properties for Depreciation Claims

While pre-1987 buildings may not qualify for Division 43 deductions, renovations and improvements often create significant depreciation opportunities.

Error: Advising clients that older properties dont warrant a depreciation schedule.

Solution: Assess all structural improvements and added assets for potential Division 43 and Division 40 claims, even on older properties.

4. Forgetting Second-Hand Asset Depreciation for Capital Gains Offsets

Depreciation of second-hand Division 40 assets, though not annually deductible for individuals, must be recorded for capital gains tax (CGT) purposes.

Error: Neglecting to factor in second-hand asset depreciation as a CGT offset during property sales.

Solution: Maintain an accurate depreciation schedule to ensure compliance and maximize CGT benefits.

5. Missing Depreciation on New or Scrapped Fit-Outs

Business fit-outs, whether installed, refurbished, or scrapped, can provide significant depreciation deductions.

Error: Overlooking claims on newly added or disposed of assets, such as carpets, blinds, or partitions.

Solution: Document all fit-out changes to maximize deductions for current use or scrapping.

6. Failing to Back-Claim Depreciation Deductions

Many clients fail to realize they can back-claim depreciation for previous years.

Error: Not amending tax returns to include unclaimed deductions.

Solution: Amend past tax returns (up to 2 years for individuals, 4 years for entities) to recover missed deductions.

Key Takeaways

• Stay Updated on Legislation: Ensure familiarity with the latest tax rules and their applications to various ownership structures.
• Leverage Expert Services: Work with quantity surveyors and depreciation specialists to create compliant and thorough schedules.
• Document and Assess: Record all improvements, asset changes, and historical costs for accurate claims.

Avoiding these errors ensures clients can fully realize their depreciation entitlements and maintain compliance with the ATO.