Non Cash Expenses Guide

Non Cash Expenses Guide

Non Cash Expenses Non Cash Expenses (NCEs) are those tax deductible expenses where the annual tax deduction does not directly match the cash expenditure in any given year. This guide will demonstrate the main non cash expenses of depreciation on property assets, amortisation of borrowing expenses and amortisation of construction costs (also known as building allowance).   Read about the Property Investor Suite.   Read a guide about Negative Gearing.   Read a guide about Capital Gains Tax.

The Non Cash Expenses examples will be quite simple and you should be aware that complexities can arise where properties were used for private purposes for a period of time, where assets within the property are sold for a greater price than they were purchased for and others which your accountant can advise you on.

Asset Depreciation Depreciation is a tax deduction that is an estimate of the devaluation of assets (such as stoves, carpet or fittings) purchased for, or already in a property. The actual rate of depreciation depends on the type of asset and the method chosen for depreciation. The Diminishing Value Method (DVM) uses a higher rate of depreciation than the Prime Cost method (next section) which allows for higher depreciation claims in the early years and continually reduced claims for subsequent years. This method should be more beneficial from a cash flow perspective if you are already on the highest tax bracket or have a stable long term income.
The Prime Cost Method uses a lower rate of depreciation with the amount of depreciation calculated on the original balance instead of the reducing balance. The depreciation rates for both methods are available from the Taxation Office or through your accountant or financial advisor. This method should be more beneficial from a cash flow perspective if you are not yet on the highest tax bracket and expect your income to grow within the next few years so that you are in a higher tax bracket. Depreciation is claimed from the purchase date of the asset. So that if you paid $5,000 on 1 April you would claim 91 days (up to June 30) of 365 days times the full year total. In this example you would claim 91 / 365 x 650 (or $162.50) in the first year.
Cash and Non Cash Expenses Cash expenses are easy to understand. You spend $1,000 in a financial year and claim the $1,000 as a tax deduction. Assuming a simplified tax rate of 40% the cash equivalent of that claim is $400. With a non cash expense it is simply a matter of spreading out the same claim over a number of years. Although you may spend $1,000 in the first year to buy an asset only say 20% (or $200) of it is deductible as depreciation in that year giving a cash equivalent of $80. In the following year you may spend nothing on asset purchases but you are still able to claim a portion of the remaining unclaimed balance (in this case $800). So 20% of $800 (or $160) is claimed. This continues over the life of the asset until the whole $1,000 is claimed. The total deduction for the cash expense and the non cash expense is essentially the same over time (allowing for sales of assets etc) but it takes longer to claim the tax concessions for non cash expenses.
Borrowing Expenses Borrowing expenses are those costs involved in obtaining loan finance for your investment property. They include loan application fees, mortgage insurance and the stamp duty on the mortgage (but not the state government stamp duty on the property). The calculation of borrowing expenses is very similar to the prime cost method of depreciation with a few minor differences. Borrowing expenses can be claimed over the lesser of 5 years (at 20% per year) or the term of the loan. Additionally, you can claim the balance of remaining borrowing expenses if the property is sold prior to the whole amount being claimed. Borrowing expenses are claimed from the date that the expenses were incurred. So that if you paid $500 on 1 January you would claim 183 days (up to June 30) of 365 days times the full year total. In this example you would claim 183 / 365 x 200 (or $100) in the first year.
Building Allowance Building Allowance is a tax deduction based on the original construction costs of properties constructed after 18 July 1985. Construction costs include the initial labour and material costs but do not include land costs or landscaping. The building allowance rate is 4 percent for properties constructed before 15 September 1987 and 2.5 percent for those constructed after that date. If details of the original construction costs are unavailable, the Tax Office will accept an estimate provided by a qualified person such as a quantity surveyor. The costs of employing a qualified person should be recovered in a short period through the extra tax benefits from the building allowances. The claim for building allowance again operates quite similarly to prime cost depreciation however you can only claim construction costs from the time you purchase the property and you must use the remaining balance of construction costs at that time. So, for example, if a property was constructed 10 years ago at a cost of $100,000 and you purchased it today, you would start with a balance of $75,000 ($100,000 x 2.5% x 10 years) and continue to claim $2,500 per year ($100,000 x 2.5%) until that balance reduced to nil. If you sold the property, the balance at the sale date is 'transferred' to the new owner to be claimed over their period of ownership (assuming it is used as an investment property). Refer to the Capital Gains Tax guide to see the new rules relating to building allowance on properties purchased after 13 May 1997.
Property Investor Suite The Property Investor program works out all depreciation and amortisation values based on the source data (eg the asset purchase details) without you having to do any calculations.
Disclaimer The information presented on this website does not constitute financial advice and is for general purpose use only. You should always consult your financial advisor before making investment decisions.