Tax depreciation is…
The Australian Tax Office allows for owners of income producing properties to claim a tax deduction called depreciation. This claim is against the buildings structure along with its plant and equipment. As the building get older and the items begin to wear out they lose value and are therefore depreciating in value.
Tax depreciation helps investment property owners claim more
In many of our conversations with clients we become aware of how little is known about depreciation as a claimable deduction. The more concerning fact is that often clients who are already in the investment market do not have any kind of depreciation schedule on existing property investments which is simply costing them thousands each year. Depreciation is a non-cash deduction meaning you do not need to spend money to claim it.
What is deductible under capital works allowance?
Capital works allowance or building write-off refers to the tax deduction for the building’s structure and items considered to be permanently fixed to the property. In a residential property, capital works deductions are available to be claimed at 2.5% for the ATO specified life of the property – 40 years.
Here are a few examples of the depreciable items you may be able to claim under a capital works allowance for both residential and commercial properties:
- Built-in kitchen cupboards
- Clothes lines
- Doors and door furniture (handles, locks etc.)
- Fences and retaining walls
- Sinks, basins, baths and toilet bowls.
What is plant and equipment?
Plant and equipment assets are items which are considered by the ATO to be easily removable from the property. The depreciation rates and effective lives of all ATO specified plant and equipment assets differ by asset and even by industry.
Examples of items that can be depreciated as plant and equipment include:
- Hot water systems, heaters, solar panels
- Air-conditioning units
- Blinds and curtains
- Light shades
- Swimming pool filtration and cleaning systems
- Security systems.
Research by a leading quantity surveyor shows that between 15 – 35% of the construction cost of a residential building is made up of plant and equipment assets. Maximising plant and equipment deductions is one of the keys to ensuring increased depreciation claims for a property owner.
How do property investors claim depreciation?
In order to claim depreciation deductions property investors generally need to enlist a specialist Quantity Surveyor to complete a comprehensive tax depreciation schedule. The schedule outlines the deductions available on an income producing property and is used each financial year when preparing tax returns.
Plant and equipment assets (division 40): Includes assets which can be easily removed from the property. The asset’s condition, quality and effective life all determine the allowances available.
Capital works deduction (division 43): Is the deduction for the building’s structure. Available on properties constructed post 1982 (non residential) and 1987 (residential).
Lets take a look at a simple case study to outline the benefits of having a Depreciation Schedule .
- Ben purchased a new three bedroom house for $600,000 just over one year ago.
- He rented his property and received a rental income of $545 per week, or $28,340 per annum.
- Expenses for his property for interest, rates, management fees and maintenance costs totalled $39,067.
- Towards the end of the first year of owning the property, Ben’s annual after tax outlay amounted to $6,758 or $130 per week.
At the end of the financial year, Ben contacted a reputable quantity surveyor who completed a thorough site inspection and provided a detailed tax depreciation schedule for the property. The schedule showed that Ben could claim $11,200 in depreciation in the first full financial year alone.
The following table shows Ben’s scenario both before and after tax depreciation was claimed.
By claiming depreciation, Ben reduced his annual outlay for the property to $2,614 per annum or $50 per week. This was a difference of $80 per week in Ben’s pocket, or $4,144 for the first full financial year.