Albert Einstein once said, “If you can’t explain something simply, then you don’t understand it well enough.” Let’s put this to the test with tax depreciation schedules!
A tax depreciation schedule is a report detailing the depreciation entitlements available for your investment property. These entitlements are divided into two categories:
Capital Allowances (Division 43)
Capital allowances are based on the historical construction cost of the property, excluding plant and equipment assets (more on these later). You can claim capital allowances on your original residential property if it was constructed after September 15, 1987, or on any qualifying renovations or improvements completed by you or a previous owner.
For example, if your property was built in 1996, we estimate the construction cost at that time. You can claim 2.5% of the value each financial year. If the total build cost was $200,000 and the plant items were $30,000, the remaining $170,000 would attract a 2.5% deduction, equating to $4,250 each financial year for 40 years from the date of construction.
Plant & Equipment Items (Division 40)
Plant and equipment items are typically ‘loose assets’ or control panels for automated systems as defined by the Australian Taxation Office (ATO). Each year, the ATO publishes a list of these assets. Common plant assets in residential properties include:
- Bathroom Accessories
- Exhaust Fans
- Hot Water Systems
- Carpets
- Vinyl
- Blinds
- Curtains
- Air Conditioners
- Door Closers
- Security Systems
These assets are estimated as part of a depreciation schedule, and you can generally claim between 100% and 20% of the estimated residual value each year. Each item has a different depreciation rate.
The Complete Depreciation Schedule
A tax depreciation schedule combines these two components, showing 40 years’ worth of depreciation in two methods: diminishing value (more aggressive in the early years) and prime cost (maintains a constant level). This can significantly boost an investor’s cash flow.
Changes Introduced in the 2017-18 Federal Budget
Recent changes limit depreciation claims on investment properties purchased after May 9, 2017. According to the new guidelines, investors can no longer claim depreciation on plant and equipment assets installed by a previous owner. Only components purchased by the current owner are claimable. Properties purchased before May 9, 2017, remain unaffected.
What can you claim on properties purchased after May 9, 2017?
- Capital Works: Depreciation of the actual building is still claimable. Your Quantity Surveyor will prepare a tax depreciation schedule to ensure you claim all eligible deductions.
- Renovation Costs and Self-Purchased Plant & Equipment: Any renovation costs and new assets you purchase, like dishwashers and blinds, should be included in your depreciation schedule.
- Newly Built Properties: New properties are not affected by these changes, allowing full claims on both capital works and plant & equipment.
Impact on Your Tax Return
We’re not accountants, so always consult a professional for personalised advice. However, generally speaking, total depreciation deductions reduce your taxable income.
For instance, if your salary is $88,000 per year with no other deductions, you’d pay $20,507 in tax (2015/2016 rates). If you have $9,183 worth of depreciation deductions, your taxable income drops to $78,817, reducing your tax to $17,162.52—a saving of $3,344.48 in the first year. Given that a depreciation schedule costs around $600-$700, it pays for itself multiple times over within a year.
Why Contact a Quantity Surveyor?
Not all properties will achieve high deductions, but many will. The key is to consult with a quantity surveyor who can provide an estimate of your potential deductions. These tax savings can significantly enhance your investment cash flow and turn a daunting tax season into a rewarding experience.
Take Action Now
Maximise your property investment returns by getting a professional tax depreciation schedule. Contact us today to find your next investment property, or get in touch with Mike at MCG Quantity Surveyors to ensure you optimise your tax deductions and enhance your investment returns. Let us help you make the most of your property investments!
