The ATO allows Property Investors to claim a deduction to the building and plant and equipment items it contains. Depreciation can be claimed by any owner of an income-producing property whether the property is new, old or previously a family home. This deduction essentially reduces the investment property owner's taxable income so they pay less tax!
These deductions could save you thousands of dollars each year which you can put towards reducing your mortgage faster or improving your investment property which will increase your rent and improve your cash flow further. This is the fundamental strategy used by successful property investments to maximise their negative gearing benefits.
So let's hear what one of the industry's leading providers of depreciation reports BMT, has to say about the most common questions asked by property investors:
All ATO specified plant and equipment items as well as building write-off allowance (where the building qualifies) can be claimed.
Plant and equipment items are basically items that can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items include mechanically or electronically operated assets, even though they may be fixed to the structure of the building. Some examples of plant and equipment items include:
- Hot Water Systems
- Garage Door Motors
- Freestanding Furniture
- Air Conditioning
The building write-off allowance is based on historical building costs of the building and includes the bricks, mortar, walls, flooring, wiring etc.
No. Contrary to popular belief:
- Both new and old properties will attract some depreciation deductions. A common myth is that older properties will attract no claim.
- If a property owner has not been claiming or maximising tax depreciation deductions, the previous two financial year’s tax returns can be adjusted and amended.
The ATO specifies individual effective lives for all plant and equipment items. Our reports show the estimated cost for each item and its contribution to the depreciation total per financial year. The original building structure and capital improvements, or Division 43, are all depreciated at the same effective life rate, consequently individual costs for these items aren’t expressed in the report. If required by the ATO, the estimates for division 43 can be justified. .
Two methods can be applied when depreciating property, the Diminishing Value (DV) and Prime Cost (PC) method. The intentions of the property investor will determine which depreciation method will be most suitable for them.
Under the diminishing value method the deduction is calculated as a percentage of the balance you have left to deduct. The formula for calculating depreciation using the diminishing value method is:
Properties settled pre 10th May 2006
Plant’s effective life
Properties settled on or after 10th May 2006
Plant’s effective life
*Note: On average this change will increase the rate of depreciation by 33%
Under the prime cost method the deduction for each year is calculated as a percentage of the cost. The formula for determining the amount of depreciation deduction under the prime cost method is:
Properties settled pre 10th May 2006.
Plant’s effective life
It depends on how you want to claim.
If you claim using the Diminishing Value Method (DV), you are claiming a greater proportion of the assets cost in the earlier years of the effective life. For example, if the owner purchased the property for the purposes of a short term investment and planned to sell it in approximately five years time, the DV rate would be a more attractive option to take, as it provides higher returns over the earlier years. If you claim using the Prime Cost Method (PC), you are claiming a lower but more constant portion of the available deductions over the life of the property. If the owner was intending to retain ownership for a longer period of time then the PC option may be more suitable, as it provides a constant projection of what the investor’s tax deductions will be.
Our experience shows that most investors employ the diminishing value method, as depreciation deductions under this method are cumulatively higher over the first five years of ownership.
Low Cost pool - A low cost asset is a depreciable asset that has an opening value of less than $1000 in the year of acquisition.
Low Value Pool - A low value asset is a depreciable asset that has a written down value of less than $1000. That is, if the opening value of an asset is greater than $1000 in the year of acquisition but the value remaining after depreciating over time (opening value less depreciation in year 1 less depreciation in year 2 etc) is now less than $1000. Assets meeting this classification are placed in an itemised pool.
Pooling is used in conjunction with the diminishing value method to maximise deductions in the first 5 years of the depreciation report.
The age of the building can be determined by obtaining council documents with dates pertaining to the original application approval date or the Occupancy Certificate date, and final inspection date. Similar methods are used Australia wide, however some properties are privately certified...SOme ways to identify the age is to perform historical council searches regarding lodged development applications, as well as Occupancy Certificates and certified final inspections.
10. How can a Tax Depreciation tell me how much something costs especially how much it cost to build my house 10 years ago?
Quantity Surveyors are one of the few professionals recognised by the ATO to have the appropriate construction costing skills to calculate the cost of items for the purposes of depreciation... Construction costs are estimated in today’s market and historically written down to the year of construction using yearly cost indices.
From the date of construction completion, the ATO has determined that any building eligible to claim depreciation has a maximum effective life of 40 years. Therefore, investors can claim up to 40 years depreciation on a brand new building, whereas the balance of the 40 year period from construction completion is claimable on an older property.
Yes. Anything in the property that is part of a previous renovation will be estimated by our quantity surveyors and depreciated accordingly. This includes items that are not obvious e.g. New plumbing, water proofing, electrical wiring etc. For capital improvements to qualify for the Division 43 construction write off allowance, they must be completed after the 27th of February 1992.
Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, it is the demolition of any existing structure or fixture onsite that would have been eligible to claim deductions for depreciation. Scrapping of existing structures onsite is a very effective method of obtaining deductions within our tax system. It can provide additional tax credits for investors who demolish or dispose of existing buildings or any part of it which were owned as an investment asset and eligible to produce income.
Essentially, if an item is scrapped the amount that is yet to be written off for a particular asset (the residual value) can generally be claimed as a 100% tax deduction at the time of disposal.
No. A market value is a service that only a registered valuer can provide. Quantity Surveyors estimate construction costs as well as estimating costs for plant and equipment items.
Information we require to produce a Tax Depreciation and Capital Allowance report includes the following:
- Your settlement date
- Purchase price
- Access Details for Inspection (E.g. Property Manager or Tenant Details)
- Any information pertaining to improvements or additions made to the property including dates and costs where available
- The date the property became income producing (if you have lived in it as your primary place of residence previously)
This information has been provided by our good friends at BMT & Asscociates Quantity Surveyors