A leading quantity surveyor has revealed five simple renovation choices that can boost your bank balance by thousands while requiring no additional work.
Mike Mortlock, managing director of MCG Quantity Surveyors, said many renovators don’t realise their choices of fixtures, fittings and materials will ultimately affect the size of their annual tax return.
“Most renovators try and save money by tackling DIY work, but there are smarter ways to increase your result without additional hard labour,” Mr Mortlock said
“I’ve run scenarios which show investors can create added thousands in tax deductions on a renovation simply by selecting one item or finish over another.”
Tip 1: Kitchens not bathrooms
While both kitchens and bathrooms sell houses, choosing to spend more of your budget in the cooking area will improve your tax outcome, according to Mr Mortlock.
“Kitchen renovations attract higher depreciation rates than bathrooms because of the sheer quantity of assets defined as plant and equipment items – the very things that depreciate fastest under the ATO (Australian Taxation Office) guidelines.”
Mr Mortlock said all kitchen appliances are plant and equipment, whereas within the bathroom space, there’s limited similar items, like bathroom accessories and exhaust fans, that are common in investment properties.
“I’ve run some typical numbers based on a $20,000 renovation and choosing to spend up in the kitchen instead of the bathroom can result in an additional $2000 in deductions across the first three years.”
Tip 2: Carpet not tile
Mr Mortlock said some floor finishes have greater tax advantages than others.
“My tip for getting dollars back is to pick floating timber or carpet, rather than tile or polished concrete.” He said in the eyes of the ATO, carpet has a 10-year effective life and floating timber has a 15-year horizon, while tile and concrete are both classified as lasting 40 years.
“Not only are their effective lives different, but so is the way their depreciation is calculated. Mr Mortlock said carpet and floating timber are defined as plant and equipment by the ATO, while tile and polished concrete are considered part of the structure.
“This means different rules apply which results in carpet classed as depreciating by 20 per cent per year and floating timber at 13.3 per cent.
“In comparison, tile and concrete receive a simple 2.5 per cent depreciation rate each year. “So, $1000 of carpet can give you $200 worth of deductions in year one, while tile only allows $25 per annum.”
Tip 3: Small fixtures have big impact
Mr Mortlock said individual plant items with an opening value under $301 provide an instant deduction on your tax return.
“If, for example, you’re considering cost-effective approaches to cooling rooms, ceiling fans could be the way to go.“ If you have one installed for $300 or less, you’ll get a $300 deduction right away.”
Tip 4: Improve outdoor areas
Upgrading outdoor spaces provides the perfect opportunity to increase your tax return, said Mr Mortlock.
“You might consider making your rental more inviting by including a few little outdoor extras that provide great advantages for maximising rebates.
“External fridges and barbecues, for example, help improve rental appeal while also providing excellent short-term tax deductions.
“So, while the tenants are cooking up a storm and enjoying a coldie from the fridge, you can be reducing your tax responsibilities and collect a higher rebate cheque.”
Tip 5: Windows of opportunity
Mr Mortlock said one of the most cost-effective ways to boost a property’s value and take advantage of depreciation is to include window coverings.
“They help with temperature control and filtering light, while also completing the property’s fresh, new look – and they’re a terrific tax deduction too. “They can be purchased relatively cheaply and self-installed. “Best of all, most homes have a lot of windows so the deductable benefits are multiplied.”
Mr Mortlock said these five simple choices can yield far better financial results without the need to spend more.
“The idea of using a depreciation schedule to minimise tax in nothing new,” he said.
“However, by understanding what items create the most tax-effective benefits, you can make smarter choices that will add thousands to your result without having to outlay a penny more in costs.”