A tax depreciation schedule is an Australian Taxation Office (ATO) complying document that helps property investors unlock the tax deductions available to them. A schedule captures the wear and tear of a building over time. The ATO classifies this wear and tear as an expense to investors which they are entitled to claim as a tax deduction.
The ability to maximise an investor’s tax deduction depends solely on the quantity surveyors’ library of project experience. It is the lengths we go to in order to identify what is between a property’s walls and floors that maximises the tax deduction.
We find that once clients are well-informed with the tax saving potential with a depreciation schedule, the cost of a report quickly becomes insignificant and rather inexpensive!
Taller buildings attract higher depreciation. The truth behind it.
Construction costs of a house is generally lower than a high-rise apartment and typical items found in apartments such as lifts and fire services can add a great deal of costs which in turn provides higher tax deductions.
Can I claim if I am a first home buyer?
If you are buying a first home and aim to reap the government incentives and benefits, don’t make the mistake of many and think you aren’t entitled. If at any stage you decide to switch the asset from a home to an investment property, as soon as it is put on the market for rent you are entitled to start claiming the deductions.
Can I make a claim on an older property?
The ATO depreciates residential property at 2.5 percent of the estimated cost of construction over a 40-year period. So, if a building is older than 40 years then there is no further depreciation to be claimed. Recent amendments to depreciation no longer allow depreciation on plant and equipment for older purchased properties. For further information you should contact us to discuss.
Can I claim commercial premises / office spaces / warehouses?
In these properties, unlike a house, if you purchase and own the space to run your own business, the ATO will allow you to claim the depreciation on these as a deduction. If you lease out a space and have completed a fit-out to operate your business, enquire with us to ensure you get the deductions. Speak to your accountant to get proper advice suitable for you.
What if I am an overseas investor ?
If you are an overseas investor and looking at acquiring an investment property for the purpose of letting it out to tenants, by law you must lodge an Australian tax return. As such, a depreciation schedule will work favourably for you. Speak to an accountant for clarification on your tax obligations.
Knocking down and re-building ?
Before you demolish and destroy any existing plant and equipment or structural elements of the property such as an old kitchen and appliances, check with us to see if there is any residual value worth writing off as a loss. Most often we find lots of deductions that can be claimed IMMEDIATELY that financial year.
For example an old kitchen with a residual value of $4,500 may still have another 3 years’ worth of depreciation but due to the demolition to reinstate a new kitchen, $4,500 is claimable in full in the current financial year. Speak to your accountant to ensure the circumstance is suitable for you and engage a quantity surveyor to depreciate it.
What is Division 40
Division 40 refers to the plant and equipment items made up of fixtures and fittings, usually known to be easily removable assets. Each item has an effective life that is measured in years which is set out by the ATO. This can be found within the document ‘Taxation Ruling TR 2019/5 – Income tax: effective life of depreciation assets’.
With Division 40 items, you can depreciate them using either the diminishing value or the prime cost method. Although the end value is the same, many individuals select the diminishing value method for depreciation as your items depreciate at a more rapid rate within the first few years.
For example, a dishwasher has an effective life of 10 years. It depreciates at a rate of 20% of its current value per annum until it reaches the value of less than $1,000. When the value is below $1,000 the depreciation rate increases to 37.5% (as per low value pooling).
What is Division 43
Division 43 (Capital works) refers to the depreciation of the structure of the building, usually objects that are irremovable. Capital Works may also be known as Building Write-Off or Capital Works Allowance. Residential properties built after the 15th September 1987 are eligible to claim capital works deductions over a 40-year period which will be depreciated as a straight line at 2.5% per annum. When construction costs are unknown, a qualified specialist such as a Quantity Surveyor will be responsible for estimating the building.
Examples of capital works are:
Despite capital works deductions for residential properties, you are also entitled to claim depreciation on other buildings that are utilised for other purposes. Such examples are buildings used as an office, warehouse or accommodational purposes. The deduction rates applicable varies between buildings and can be found via the ATO:
Additionally, preliminary expenses such as surveying and engineering feeds are also factored in a capital works schedule.
What is the difference between Division 40 and 43?
Division 40 refers to fixtures and fittings in a property that are easily removable assets such as lights, carpet, blinds, etc. While, Division 43 refers to the structure of the building that are irremovable such as walls, tiling, roofing, driveways, etc. So, the depreciation on a property includes division 40: removable assets known as plant & equipment, and division 43: irremovable assets known as the capital works.
Therefore, a tax depreciation schedule includes these two components of depreciation and their estimated value. The schedule itself will show 40 years’ worth of depreciation in two different accepted methods. One tends to be more aggressive in the first few years (see diminishing value) and the other maintains a more constant level of depreciation (see prime cost).
Tax depreciation deductions have been boosting investors’ cash flow for years, however changes introduced in the 2017-18 Federal Budget will limit depreciation claims on investment properties purchased after 9 May 2017.
According to the new guidelines, a property investor will no longer be able to claim depreciation on plant and equipment assets installed by a previous owner. Only components that you have purchased yourself will be claimable.
Properties purchased before 9 May 2017 will be unaffected by the changes.
What deductions can you claim against a property purchased after 9 May 2017?
Depreciation of the actual building is still claimable. Your Quantity Surveyor will still be able to prepare a tax depreciation schedule to ensure you claim all tax deductions you’re entitled to.
Renovation costs and plant & equipment assets you’ve purchased yourself
Similarly, your Quantity Surveyor can list any renovation costs and include them in your depreciation schedule. New assets you purchase yourself – dishwashers, blinds etc – should also be included in the depreciation schedule and claimed at tax time.
Everything – if it’s a newly built property
Brand new property? No problem. The Federal Budget changes only affect second-hand properties so you’ll be able to claim both capital works and plant & equipment deductions as usual.
Now that we know what a depreciation schedule is, how can it change your tax return?
We’re not qualified to provide accountants advice, so you should always speak with them to find out the EXACT impact on your personal situation. Essentially though, the total depreciation comes off your taxable income. Let’s run through a quick scenario.
Let’s say your salary is $88,000 per year, and you have no other deductions. According to the ATO’s simple tax calculator, you’ll be paying $20,507 in tax (2015/2016 year).
The most important thing is to contact a quantity surveyor for an indication of the deductions you might have available to you, as the tax savings can make a huge difference to your investment cashflow and or convert the pain of a trip to the accountant into pure joy!