Depreciation – Everything You Need to Know
The older any asset gets, the more likely it will lose its value. Even with the best of efforts to maintain and care for your investment. Is your car worth the same as when it was brand new? Unless it’s a classic car, it probably has depreciated in value.
When it comes to your Australian investment property, depreciation is a non-cash expenditure. Simply put, you are allowed to claim a tax deduction on the parts of your property investment Brisbane that are expected to ‘wear out’ over time.
Depreciation is determined as reducing the value of an asset over its estimated useful economic life. It is a tax deduction, not a write-off.
However, the rules around depreciation allow you to claim the perceived loss in value of the property against your taxable income.
By using depreciation to offset your taxable income, many Australian investors have reduced the holding costs of owning an investment property.
If You Have it, Claim it – Property Depreciation
Property investors looking for ways to maximise the cash flow from their investments will typically factor depreciation into their cash flow analysis. Some investors are either unaware of property depreciation or fail to claim so. If you want to claim depreciation, you need a report prepared by a Quantity Surveyor. They are specialists in this area and set out the schedule of what you can claim as depreciation.
The ATO allows owners to claim depreciation on the structure of the building (capital works) and certain mechanical assets (plant and equipment).
Capital Works Deductions
Capital works deduction (Division 43) may be applicable for:
- Buildings or extensions (alterations + improvements).
- Alterations and improvements to the leased building and shop fit-outs and leasehold improvements.
- Structural improvements like fences and driveways.
- Earthworks for protection of the environment.
The rate of depreciation at which capital works are depreciated depends on when the construction for such property commenced and the intended use.
The 2.5% per annum means deductions can be claimed for 40 years. The following chart gives the rate of deduction for different property types:
Plant and Equipment Depreciation
Plant and equipment (Division 40) assets are the items in your investment property that can be easily removed or are mechanical. Plant and equipment deductions cover air conditioning units, heaters, security systems, etc., for residential properties, carpets and flooring, desks, commercial ovens, etc. Depreciation deduction can be availed on specific plant and equipment assets if they meet the eligibility criteria determined by ATO. The latter assigns a practical life to each asset over which depreciation is claimed.
The legislation passed in 2017 changed depreciation rules, and you can no longer claim depreciation deductions for previously used plant and equipment assets. They can still claim deductions for any new plant and equipment. For example, if you purchase an older property, renovate and then rent the property out, you can claim depreciation on your new carpet, air-conditioning unit, and the like.
Methods of Depreciation
Investors can select ‘prime cost’ or ‘diminishing value’ methods when claiming depreciation. If they use the former, they will receive deductions at a constant rate over time, and if they use the latter, the investor will claim more in the earlier years of owning the property. It’s best to chat with an accountant and understand how the different methods affect your cash flow before deciding the most suitable way for you.
Items under $300 can be written off immediately.
Depreciation Schedule – What is it, and why do you need it?
A depreciation schedule is a document that states how much depreciation you can claim as a tax deduction on your investment property over its lifetime. Specialised Quantity Surveyors prepare the report, which your accountant will need for the ATO to prove your deductions are legitimate. In the case of multiple owners, (for example, if the property is in the name of a couple), you can request a split depreciation schedule so you can each claim a portion of the depreciation from your taxable income.
Depreciation tends to be higher on brand new properties, and many investors use the tax offsets of depreciation to help lower the holding costs of their property investment Brisbane, Australia. This means minimising the day-to-day expenses of a property whilst it appreciates.