If you are a first time investor, or even a seasoned one with a large portfolio, property depreciation can be a complex topic to wrap your head around.
There are a number of intricate rules and factors which will be taken into consideration when calculating the deductions an owner can claim.
While investors are not expected to be an expert in this field, it helps to have a basic understanding so you can ensure the deductions you claim are correct and maximised.
To guide investors to become more familiar with depreciation and to help them ensure they claim the maximum deductions available, below is an overview of some of the key facts to be aware of.
What is property depreciation?
As a property gets older the building and the items within it wear out.
The Australian Taxation Office (ATO) governs legislation which allows property owners of income producing buildings to claim a deduction relating to this wear and tear.
Capital works deductions and depreciation for plant and equipment assets can be claimed by the owners of a variety of building types including residential rental properties and commercial properties such as offices, hotels, restaurants, retail spaces, educational facilities, warehouses and agricultural properties, among many others.
A depreciation schedule for a rental property is a document that outlines the expected lifespan of various components of a rental property and the corresponding tax deductions that can be claimed over time.
What types of deductions are available?
One of the reasons depreciation can cause confusion for investors is because there are two clearly defined types available:
- Capital works deductions (division 43) and
- Plant and equipment deductions (division 40)
A common mistake investors can make is to incorrectly categorise plant and equipment assets and claim them as a capital works deduction and vice versa. There is where it is important to seek expert advice and ensure that all items are claimed appropriately and as the right type of deduction.
Capital works deductions (also known as division 43 and building write-off) refer to the deductions available for the building’s structure and items considered to be permanently fixed to the property.
Examples include the foundations, walls, floors, roof, windows, doors, kitchen cupboards, toilet, sinks and tiles.
In a residential property, capital works deductions can be claimed at a rate of 2.5 per cent per year over a maximum of forty years.
In commercial properties, and other types of non-residential properties, capital works deductions can be claimed at either 2.5 or 4 per cent of the property’s historical construction cost, depending on the age and type of building.
Plant and equipment deductions (also known as division 40) can be claimed for any of the easily removable or mechanical fixtures and fittings found within a property.
Deductions for these items will be determined based upon an individual effective life as determined by the tax commissioner and can be found within the relevant tax ruling. A copy of the latest tax ruling can be found on the ATO website legal database.
There are more than 6,000 different assets an investor can claim depreciation deductions for. Some common examples include air conditioners, blinds, carpets, dishwashers, exhaust fans, garbage bins, hot water systems, rangehoods and smoke alarms.
Does the age of the property impact the deductions?
The age of a property is one factor which often unnecessarily influences the decision of some property investors in making an enquiry about what depreciation they can claim.
Investors frequently make the assumption that they cannot claim depreciation deductions because the property they have purchased wasn’t constructed recently.
While legislation states that residential property investors are eligible to claim capital works deductions for properties in which construction commenced after the 15th of September 1987, older properties have been renovated.
Previous renovation work completed within the legislated dates could entitle the owner to claim capital works deductions, even if the work was carried out by a former owner.
The construction commencement date restrictions have no impact on calculating plant and equipment deductions as depreciation for these items depend on their individual condition and quality and will be calculated based on their effective lives from the date of settlement.
While owners of newer properties will usually receive higher deductions due to the fact that construction costs have increased over time and the starting value of fixtures and fittings is usually higher in a newly constructed building, it is always worthwhile making an enquiry for an older property.
How can an investor ensure they claim depreciation correctly?
The most important step in ensuring any depreciation claim is correct and maximised is to speak with a specialist Quantity Surveyor.
A Quantity Surveyor is traditionally a cost construction consultant and they use their expertise to ascertain the costs of the building works prior to or during construction for feasibility or cost management purposes.
Quantity Surveyors can assist throughout various stages of construction and some choose to specialise by using their expertise and knowledge of taxation legislation to concentrate on depreciation.
Quantity Surveyors are recognises under Tax Ruling 97/25 as one of a select group of professionals who have the appropriate construction costing skills to calculate building costs for depreciation purposes.
Using their expert knowledge a Quantity Surveyor can perform a detailed site inspection on any property, take comprehensive notes and measurements as well as to photograph each of the assets the building contains.
This information will then be used to collate a tax depreciation schedule for an investor which outlines the deductions they can claim when they visit their Accountant to perform their annual income tax return.
Ultimately, depreciation deductions will help an investor to reduce their tax liability and a simple enquiry can help an investor to improve the cash flow they have available.
To learn more, investors can visit the tax depreciation overview page on BMT Tax Depreciation’s website.
Bradley joined BMT in 1998 and as such he has substantial knowledge about property investment supported by expertise in property depreciation and the construction industry.
Bradley is a regular keynote speaker and presenter covering depreciation services on television, radio, at conferences and exhibitions Australia-wide. Please contact 1300 728 726 or visit www.bmtqs.com.au