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Depreciation Claims in Property Investments

Leo Colgar
Leo Colgar

Property investments are always popular among Australian investors. However, the ATO is overly sensitive about claiming the correct type of expenses. Depreciation is especially important in that sense because, first of all, it is a non-cash expense, secondly, we don't have to calculate it on our side. There are quantity surveyors to do the job. Let me explain a bit further.

As a building gets older, its structure and the assets within the building are subject to general wear and tear. So, each year, the value decreases. This is called depreciation.

But, depreciation isn't all that bad because the Australian Tax Office (ATO) offers property investors the opportunity to claim the depreciating assets as a tax deduction, as long as the property is being used to generate an income.

There are two types of depreciation deductions that you can claim deductions for:

Division 43 - Capital Works Deductions

Division 43 deductions refer to the depreciation (i.e. the general wear and tear) of the structural components of the building, such as:

  • bricks and mortar;
  • retaining walls;
  • flooring; and among other things
  • electrical wiring

The structure of a residential building, if constructed after September 1987, generally has an effective life of 40 years. So, property investors can claim a capital works deduction at a percentage rate of 2.5% each over those 40 years.

Division 40 - Plant and Equipment

On the other hand, the term "plant and equipment" refers to the fixtures and fittings found within the building.

These are generally known as easily removable assets and include items such as:

  • carpets;
  • stovetops and ovens;
  • blinds; and among other things
  • air conditioning units.

These assets generally depreciate a lot quicker because they don't last as long as the structural components of a building. So, the ATO assigns an effective life for each asset. The effective life of a depreciating asset is how long it can be used to produce an income. For example, an oven has an effective life of twelve years.

So, How Can You Claim these Tax Depreciation Deductions?

Claiming these tax-deductible expenses involves identifying the value of a property and all its fittings and fixtures.

To have your property evaluated, you'll have to consult with a quantity surveyor. A quantity surveyor is a qualified construction expert who specialises in the assessment and observation of construction costs of a property.

But, besides construction costs, quantity surveyors are commonly known for are tax depreciation schedules.

The purpose of a depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim.

For example, in July 2019, Larissa purchased her first investment property for $305,000.

She decided to go for the buy and hold investment strategy, so she immediately rented it out.

Her accountant advised her to reach out to a quantity surveyor to see how money she could save through her depreciation deductions.

After consulting with one of the friendly quantity surveyors at Duo Tax, they concluded that her property's construction started in July 2007 and was completed in March 2008. The quantity surveyor estimated that the total cost of construction was $195,000.

According to the depreciation schedule that Larissa ordered from Duo Tax, she can claim a capital works deduction at a depreciation rate of 2.5% each as the construction of his property commenced after 15 September 1987.

So in her first year of owning and renting out her investment property, Larissa could claim the following in capital works deductions:

$195,000 x 2.5% = $4,875

As long as Larissa is generating an income property, she can continue claiming a capital works depreciation deduction until 2047 because one report can last 40 years from the construction date!

The report also detailed the depreciation of her plant and equipment assets, such as the new wooden floors she installed, over its effective life.

The best part? Larissa only needs to order the report once, and the cost is 100% tax-deductible as well!

Our preferred quantity surveyors Duo Tax has helped thousands of property investors maximise their deductions through the power of depreciation reports. As avid investors themselves, their mission is to help all investors get the most value out of their investments.

You can obtain your depreciation schedule from Duo Tax in 3 simple steps:

  • Get in touch with them, and they will ask you a few simple questions to see if your property qualifies. We can also put you in contact with them.
  • Order a depreciation schedule over the phone or via our online form, and they will begin preparing your depreciation.
  • Within 5-10 business days, your personalised depreciation report will be delivered to you and your accountant.

If you want to know more, please do not hesitate to contact us.

Published on by BiziNet

Bright Accounting and Taxation Services

Bright Accounting and Taxation Services

Tel: 02 7200 2547
Street Address: Suite 6/208, Level 2, Foundational Business Centre, 29 Main Street Rouse Hill NSW 2155

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