Tax Depreciation Schedule – Do I need one?
As a building gets older and items within it wear out, they depreciate in value. The Australian Tax Office (ATO) allows Landlords of income producing property to claim a tax deduction called depreciation, on a buildings structure and plant and equipment assets contained within it. In order to claim depreciation deductions, property investors 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 can be used by your accountant each financial year when preparing your tax return.
The amount that the depreciation schedule says you can claim will effectively reduce your taxable income. Quantity Surveyors fees are also 100% tax deductible, and the Tax Depreciation Schedule only needs to be completed ONCE. Investment property depreciation is referred to as a non cash deduction because it does not require any ongoing payments, such as interest. The deductions are built in to your investment property, so if you do not claim the depreciation in your tax return, you are missing out on a genuine entitlement. It is your job to claim it, and the ATO does not issue reminders.
Depreciation for income producing properties defined by the ATO is claimable under two major components: Capital works allowances (division 43) and Plant and equipment (division 40).
Capital works allowance or building write-off refers to the tax deduction for the buildings 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. This allowance is available on properties constructed post 1982 (non-residential) and 1987 (residential).
A few examples of the depreciable items you may be able to claim under a capital work allowance for residential properties are:
Built-in kitchen cupboards
Clothes lines
Doors and door furniture (handles, locks etc.)
Driveways
Fences and retaining walls
Sinks, basins, baths and toilet bowls
Plant and equipment assets are items which are considered by the ATO to be easily removable from the property. The assets condition, quality and effective life all determine the allowances available.
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.
If your residential investment property was built after July 1985 you will be able to claim both Building Allowance and Plant and Equipment. If construction on your property commenced prior to this date, you can only claim depreciation on Plant and Equipment, however it will still be worthwhile. When purchasing an investment property, you should have a depreciation schedule prepared straight after settlement, if possible. That way the Quantity Surveyor will see your property in the true state of what you have purchased.
The major benefit of a Tax Depreciation Schedule is improving your cash flow, by reducing your taxable income. When depreciation is claimed correctly it can make your property investment easier to manage and free up money for further investment opportunities, such as helping you to build your portfolio faster.
DISCLAIMER: This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstance.