Maximising Tax Deductions for New Investment Builds

A key aspect of maximising the value of a new investment build is understanding tax deductions that apply to the property. Tax deductions help to offset ongoing expenses and the upfront cost of an investment by allowing investors to save on payable tax.

Utilising tax deductions is one of the most effective strategies for maximising an investment property. To ensure that you are maximising tax deductions for your investment build, here is a guide to what you can claim, and when each claim applies. 

What Tax Deductions Can You Claim for New Builds?

Tax deductions for investment properties can be claimed for expenses incurred during construction, maintenance, and ownership. These deductions are split into three main areas: capital works, plant and equipment, and ongoing expenses.

Capital Works (Division 43)

Capital works cover the structural part of the investment property - walls, flooring, roofing, garages, and other fixed elements like the plumbing system. These elements have a long lifespan over which they naturally depreciate in value. To compensate for this depreciation, the Australian Taxation Office (ATO) allows investors to claim tax deductions on capital works for up to 40 years (for properties built after 16 September 1987). Investors can claim 2.5% of the initial construction costs each year in tax deductions.

New investment builds are ideal for claiming capital works deductions as the full 40 years apply. For second-hand property, the number of eligible years to claim capital works deductions will be reduced by the time the building has already existed. For example, if a property is 15 years old, only 25 years of deductions remain.

Capital works also include later improvements, such as building extensions or major renovation work. These works follow the same capital works depreciation rules, with separate timelines starting from the date the work was completed.

Plant and Equipment (Division 40)

Plant and equipment covers items inside the property that are not permanent parts of the structure including carpet, appliances, blinds, smoke alarms, hot water systems, security features and light fittings. Each of these items has its own effective lifespan and rate of depreciation, and can be claimed separately for tax deductions.

For new investment builds, plant and equipment depreciation claims are applicable to every asset that comes included upon settlement. In some cases, low-value assets can be written off in the first year, creating an early reduction in taxable income.

Ongoing Expenses

The expenses incurred in renting out and maintaining the investment property can also be claimed as a tax deduction, often in the first financial year.

You can claim the following expenses as tax deductions:

• The interest on a new-build investment loan is tax-deductible. This includes payment of bank fees and administrative costs of the loan.
• You can include property management fees and real estate agent fees related to the investment property in your tax deductions.
• Repairs and maintenance work related to building upkeep are tax-deductible. This is not usually an immediate concern for new builds, as any major repair work is covered by builders' insurance for the first few years (6 years and 6 months in Queensland).
• Water rates and usage, as well as the cost of landlord insurance, are tax-deductible. 

How To Maximise Tax Deductions for A New Build

1. Obtain a Tax Depreciation Schedule 

A tax depreciation schedule provides a clear picture of how much you can claim each year on the investment property. It also accounts for the maximum amount of deduction upfront, which can help with cash flow planning.

To get a tax depreciation schedule, you’ll need to engage a Quantity Surveyor to assess the value of the new build. Once its value has been verified, you’ll receive a report outlining the amount of depreciation to claim each year, up to the 40-year maximum.

2. Keep Records of All Expenses 

You will need to provide the ATO with proper documentation to support the validity of each tax depreciation claim. 

Keep a copy of all receipts and screenshots of all expenses related to the new investment build property. 

If you do not have the proper supporting documentation, your tax depreciation claim can be unsuccessful.

3. Work With an Investment Builder 

If you’ve yet to decide on a builder for your new investment build, consider working with an investment builder.

Investment builders, like Builder Direct, specialise in property designs and building locations that maximise long-term returns. More importantly, investment builders can also provide advice on the tax deductions that apply to the new build, and connect you with trusted service providers in the region.

Builder Direct offers house and land packages for investment in Mackay and Cairns, located in high-growth regions that offer a consistent return on investment. Get in touch with our team for a free customised quote based on your investment goals.