Depreciation is a tax deduction available to property investors. Your investment property earns an income (in the form of rent from your tenants). So, as with any activity that produces income, various tax deductions are available to you.
Usually, these tax deductions are things you’ve spent money on, such as property management fees, council rates, and other miscellaneous items.
You pay an amount of money, receive a tax invoice and receipt, and use that piece of paper to claim a tax deduction when tax time comes around.
However, rental property depreciation is what the tax office calls a ‘non-cash deduction’ – which means you don’t physically fork out cash to claim a deduction.
It is often referred to as ‘on paper deductions’ for the same reason. Depreciation allows you to claim a tax deduction for the wear and tear on an investment property over time.
This tax deduction recognises that the building itself and its plant and equipment (air-conditioners, blinds, carpet, etc.) will become worn out over time and eventually need to be replaced.
There are two components of a tax depreciation schedule that you can claim:
1. The capital works deduction.
The capital works deduction relates to the structure of the building and includes items like concrete, brickwork, tiling, and roof.
The Australian Taxation Office (ATO) has classified the items as lasting 40 years.
You are entitled to claim this deduction based upon the original construction cost at a flat rate of 2.5% per annum.
Let’s say your house costs $300,000 to build the structure; you could claim $7,500 per annum from when the building was completed.
If you buy that property when it’s 20 years old, the new purchaser would be able to claim the same amount, $7,500, but only for 20 more years.
This allowance is also known as the Division 43 Capital Works Allowance.
2. The Plant & Equipment Allowance
Plant & Equipment depreciation enables you to claim depreciation on moveable items and wear and tear faster.
These items can include such household items as:
As you can see from the above table, these items will need to be replaced sooner than the bricks and concrete in your house.
The ATO recognises this, and you are entitled to claim these items at a much faster rate.
In the good old days, you used to claim depreciation on plant and equipment items regardless of how old they were.
However, in 2017 the Government changed the laws about the depreciation of Plant & Equipment so that you can only claim these items if you acquire them brand new.
How does a Depreciation Schedule help me?
As with any tax deduction, depreciation reduces your taxable income. So if your income was $100,000 for the year, and you claim $10,000 worth of deductions, you only pay tax on $90,000.
Can’t my accountant prepare a depreciation schedule?
As Quantity Surveyors, we are experts at estimating construction costs. That’s what we do daily, whether it is for a property developer, a property financier, or a builder.
That’s why Quantity Surveyors were highlighted as “appropriately qualified” to estimate the construction costs, where the costs are unknown, in accordance with Tax Ruling 97 / 25.
Tax Ruling 97/25 - also outlines who shouldn’t be preparing tax depreciation schedules.
“Unless they are otherwise qualified, valuers, real estate agents, accountants, and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.”
How much does a depreciation schedule cost?
The cost of a depreciation schedule can vary and are subject to many factors, including:
- The location of the property
- The size of the property
- The type of property
- Whether the property needs to be inspected or not
If your property is residential, then the main factor will be whether or not the property needs to be inspected.
When the depreciation laws changed in 2017, some properties now do not need an inspection as firms like Washington Brown have the actual construction cost on many buildings in Australia.
If you require a depreciation schedule - you can get a quote here.
Tyron Hyde is the CEO of Washington Brown and is considered one of Australia’s leading experts in property tax depreciation. He is also a registered tax agent. Washington Brown manages construction costs worth over $2 billion and completes 10,000 schedules annually. For a depreciation schedule quote CLICK HERE and follow the 3 simple steps or estimate your depreciation cost.
The Washington Brown Free Depreciation Calculator will give you an estimate of the depreciation deductions you could claim on your investment property.
Read more Expert Advice articles by Tyron
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.