If you’re investing in property, you could be entitled to save on tax by claiming depreciation. To claim depreciation, you’ll first need a depreciation schedule. We let you know what it is and how it can benefit you as a property investor.
If you’re not claiming depreciation on your investment property you could be missing out on significant tax savings. Let’s break it down.
What Is A Depreciation Schedule And How Does It Save You Tax?
A Tax Depreciation Schedule is simply a report detailing the depreciation entitlements available to you within your investment property. Generally, the ATO lets property investors deduct the cost of depreciation from their overall income. This means, as a property investor, you could be enjoying significant tax savings at the same time as your property investment grows.
What Can You Claim Depreciation On?
There are generally two types of depreciating assets that you can claim: capital works and plant and equipment.
1. Capital Allowances (Division 43)
Capital allowances are based on the historical construction cost of the property, excluding the value of plant and equipment assets, which we’ll come to in a moment. Capital allowances can be claimed on your original residential property, where it was constructed after the 15th of September 1987, or on any subsequent qualifying renovations or improvements completed by either the previous owner or yourself.
So, to put it another way, say your property was built in 1996. We will estimate the cost to build the property at that time, and you’ll be able to claim 2.5% of the value each financial year. So, if the total build cost was $200,000 and the plant items were $30,000, the remaining $170,000 would attract a 2.5% deduction of $4,250 each financial year for 40 years from the date of construction.
2. Plant And Equipment Items (Division 40)
Plant and equipment items are generally ‘loose assets’ or control panels for automated systems as defined by the Australian Taxation Office (ATO). The ATO publishes a list of these assets every year around July. In a residential property, the most common plant assets are:
- Bathroom Accessories
- Exhaust Fans
- Hot Water Systems
- Air Conditioners
How Do You Claim Depreciation?
You won’t be able to make your claim for depreciation in one hit. Instead, just as the value of many items declines slowly over time, you’ll need to deduct a percentage of the total cost each year. MCG Quantity Surveyors provide a 40 year report that outlines your claim each financial in two different accepted methods. One tends to be more aggressive in the first few years (diminishing value) and the other maintains a more constant level of depreciation (prime cost).
If you want to claim depreciation, you’ll also need to put together a formal depreciation schedule. This sets out every depreciating asset in your home.
How Do You Know If You’re Eligible To Claim Depreciation?
Most investment property owners are entitled to claim depreciation. That said, since new rules were brought in on 09/05/2017, investors who buy an established property can’t claim the depreciation on plant and equipment assets included in their purchase. They can, however, still claim depreciation for capital works, as well as for any assets they replace in the property. If you have lived in the property after the 01/06/2017 you are ineligible to claim the plant and equipment items on a existing or brand new property.
If you buy a new property, buy through a company structure, or buy a commercial property, these changes won’t apply to you.
When Should You Get A Depreciation Schedule Drawn Up?
You should ask for a depreciation schedule when you purchase a property, complete any work or buy any assets. After all, the newer something is, usually the higher its value and the more its price will decline.
Alternatively, if you already have an investment property and don’t have a depreciation schedule you should obtain one as soon as possible, or you could be missing out on tax savings right now. You are able to back claim two years’ worth of deductions with your accountant.
Who Can Prepare A Depreciation Schedule?
If you think your accountant can draw up your depreciation schedule, think again. You’ll need to engage a properly qualified construction professional - such as a quantity surveyor - to perform the task.
Our strategic partner, MCG Quantity Surveyors, can work with you to develop a comprehensive depreciation schedule that takes into account all the depreciation on your investment property so that you reduce your tax and maximise your income and cash flow.
Like To Discuss How You Could Benefit From A Depreciation Schedule?
Contact our team of specialists today.