Claiming back thousands on your investment property every year without incurring any additional costs sounds too good to be true. However, it’s possible with depreciation deductions.
Depreciation is a non-cash deduction, meaning you don’t need to spend any money to claim it. Unfortunately, many fail to claim depreciation as they are unaware of its benefits or availability.
What is property depreciation?
As a building gets older, its structure and assets wear out – they depreciate. If you own an income-producing property, you can claim this depreciation as a tax deduction.
What can be claimed as a depreciation deduction?
Depreciation deductions can be claimed under two categories:
- Division 43 capital works deductions
- Division 40 plant and equipment depreciation
Capital works deductions can be claimed for the wear and tear that occurs to the structure of the property and associated fixed items. Common examples include roofs, walls, mortar and doors.
Capital works deductions make up an average of 85 to 90 per cent of a total depreciation claim. Any residential building where construction commenced after 15 September 1987 will be entitled to claim capital works deductions at a rate of 2.5 per cent for up to forty years.
However, if you own an older investment property, you shouldn’t rule out claiming capital works deductions. In most instances, older buildings have undergone some form of renovation that provide capital works deductions. You can also claim qualifying capital works completed by the previous owner.
Plant and equipment depreciation can be claimed for the easily removable fixtures and fittings found within the property. Common examples include smoke alarms, carpet and air conditioners.
Depreciation for plant and equipment assets differs significantly from depreciation of capital works. These assets can be depreciated based on their effective life, or if eligible, at an accelerated rate in a low-value pool.
The effective life of an asset is used to work out its decline in value, or depreciation. This is calculated using either the diminishing value or prime cost method of depreciation.
The most commonly used method of depreciation is the diminishing value method. Under this method, the deduction is calculated as a percentage of the asset’s depreciable balance. So, the deductions are higher in the earlier years of ownership and diminish over time.
Alternatively, under the prime cost method, the deduction for each year is calculated as a percentage of the cost. If this method is used the deductions are not as high in initial years but are spread out over time showing a more even claim per financial year.
Once a method of depreciation is chosen for a plant and equipment asset, it cannot be changed. Your investment strategy will determine which method is best. You will need to consider how long you intend to hold the property and if you’re going to need higher deductions now or in future years. A Koste Tax Depreciation Schedule provides comprehensive depreciation information for both methods and your accountant will work with you to ensure that you choose the right option for your investment strategy.
The low-value pool of depreciation is available for plant and equipment assets that are valued less than $1,000. Once allocated to the low-value pool, the assets will be depreciated at an accelerated rate of 18.75 per cent in the year of purchase, then 37.5 per cent every year following. There are two different ways that an asset can qualify for the low-value pool.
- Low-cost asset: is a depreciable asset that has an opening value of less than $1,000 in the year of acquisition.
- Low-value asset: is a depreciable asset that has a written down value of less than $1,000. That is, if the opening value of an asset is greater than $1,000 in the year of acquisition but the value remaining after depreciating over time is now less than $1,000. Assets meeting this classification are placed in the pool.
In addition to the low-value pool, eligible assets under $300 can be written off using the ‘immediate write-off’ option.
Legislation changes made in 2017 impact eligibility for plant and equipment deductions. Under the changes, if you own a second-hand residential property and exchanged contracts after 7:30pm on 9 May 2017, you can’t claim deductions on previously used plant and equipment assets. You can still claim depreciation for the assets you bought brand new for the property, if the property has been substantially renovated and for all capital works made by the previous owner.
A substantial renovation occurs when all, or substantially all, of a building is removed or replaced. This includes replacing or removing external walls, internal supporting walls, floors and staircases. While a cosmetic renovation is a more surface-level renovation. Common cosmetic renovations include replacing carpets, painting and changing light fittings.
Whether a property has been renovated or not, a specialist quantity surveyor will determine every eligible plant and equipment asset available and all qualifying capital works deductions.
Capital gains tax
When you sell an income-producing property this triggers a Capital gains tax (CGT) event.
You may not be liable for some of the costs involved in paying CGT if you fall within any exemption rules provided by the Australian Taxation Office (ATO). These include the six-month rule, six-year rule, primary place of residence exemption and the 50 per cent discount.
How does claiming depreciation maximise cash flow?
A tax depreciation schedule is required to calculate depreciation deductions. Claiming these deductions can make a significant difference to your cash flow as they reduce your pre-tax income, meaning you pay less tax.
A tax depreciation schedule has all the necessary information your accountant needs to determine your deductions each financial year. Koste Tax Depreciation found residential clients an average of almost $9,000 in first full financial year deductions last financial year.
How do I get a tax depreciation schedule?
Koste Tax Depreciation makes the process of obtaining a tax depreciation schedule easy. Once the team has the basic details of the property, they will provide an initial estimate of expected depreciation deductions to ensure the schedule is worthwhile.
Then, a site inspection is conducted by one of Resi Inspects specialist staff. The purpose of this inspection is to document all depreciable assets to ensure ATO compliance and that maximum deductions can be made.
All the information gathered will allow the specialist Koste team to prepare your tax depreciation schedule. To make it more convenient for you, Koste can send your schedule directly to us.
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Article provided by Koste Tax Depreciation.
Mark Kilroy (MRICS MAIQS Bsc (Hons) Quantity Surveying) is the Chief Executive Officer of Koste Chartered Quantity Surveyors