What is Property Depreciation?

As the owner of an investment property you’re entitled to claim depreciation on your building and its fixtures and fittings. Claiming depreciation is a significant taxation benefit, and one which many investors are unaware of. Depreciation is a non-cash deduction – you do not need to spend any money to claim it. 

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What is depreciation?

As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a deduction. Depreciation can be claimed by any property owner who obtains income from their property.

To maximise taxation returns owners of investment properties should organise a depreciation schedule upon settlement. A tax depreciation schedule is a document which helps the property owners’ accountant identify exactly how much depreciation can be claimed.

Depreciation for Property Investors

Maximise returns with a tax depreciation schedule

Claiming all the depreciation property investors are entitled to on an investment property can make a big difference to their cash flow. Of all the tax deductions available to property investors, depreciation is most often missed as investors do not need to spend money for it to be claimed. It is already there to be claimed on the building structure and on existing fittings and fixtures.

“Research shows that 80% of property investors are failing to take advantage of property depreciation and are missing out on thousands of dollars in their pockets,” said Bradley Beer, Managing Director of BMT Tax Depreciation.

What is in a depreciation schedule?

When a quantity surveyor completes an investor's capital allowance and tax depreciation claim, two main elements are taken into consideration;

•   Capital Works Allowance (Division 43) and

•   Plant and Equipment (Division 40).

Capital Works Allowance

The capital works allowance is a deduction available for the structural element of a building including fixed irremovable assets; this is commonly referred to as the building write off. Only some properties will qualify for this allowance.

Depending on the age of the building you can claim either 2.5% or 4% of its historical construction cost as the following graph represents.

Depending on age, buildings are qualified for the Capital Works Allowance which is a deduction on the structural elements of the building. A qualified tax depreciation specialist can help you identify maximum depreciation deductions on your pre- or post-1987 property.

A depreciation schedule for the life of your property

A depreciation schedule should be structured so your accountant can amend previous years’ tax returns to re-coup any unclaimed or missed depreciation benefits. It should be pro rata calculated for the first year of ownership based on the settlement date. A tax depreciation schedule should take into consideration whether there are multiple owners of the investment property and divide the benefits accordingly.

If you own an investment property, you need a depreciation schedule. A professional tax depreciation schedule will increase the cashflow of your investment property.

What is deductible under Capital Works Allowance?

Here are a few examples of what depreciable items you may be able to claim.

•   Built in kitchen cupboards

•   Clotheslines

•   Door and window fittings (such as handles, locks etc)

•   Driveways

•   Fences and retaining walls

•   Garages

•   Sinks, basins, baths and toilet bowls.

Plant and Equipment

The plant and equipment element is a deduction available for removable assets which are identified through ATO legislation as assets which depreciate at a faster rate than the building. Each plant and equipment item has an effective life and the depreciation available on that item is calculated accordingly.

Research by BMT Tax Depreciation shows that between 15 and 35% of the construction cost of a residential building is made up of plant and equipment articles. These include things like carpet, hot water systems, blinds, light fittings and many other items. Maximising their value is the key to maximising a depreciation claim.

What is plant and equipment?

Examples of items that can be depreciated as plant and equipment include:

•   Carpets, vinyl, linoleum and other removable floor coverings

•   Hot water systems, heaters and solar panels

•   Air conditioning units

•   Blinds and curtains

•   Light fittings

•   Swimming pool filtration and cleaning systems

•   Security systems

How much depreciation can you expect to claim?

An investor’s depreciation benefits vary depending on the type of building, its age, its use and its fit out. Commercial, industrial and residential investment properties can all claim depreciation based on the diminishing value or prime cost methods of depreciation.

Ensuring that each depreciation claim is maximised on any building requires a combination of construction costing skills and thorough knowledge of current tax depreciation legislation. For this reason, it is recommended for investment property owners to consult a specialist quantity surveyor to prepare a depreciation schedule before lodging their tax return.

Residential & Commercial Depreciation Examples

The depreciation benefits depend greatly on the type of building, its age, use and fitout.

Based on the diminishing Value method of depreciation, several scenarios are provided below as an appropriate guide.

Depreciation: An Investor Profile

Below is a basic property scenario to demonstrate the difference depreciation can make to a property investor. Although the depreciation benefit to every investor will vary, the majority of property investors fall into the 37% tax bracket (salaries between $80,000 - $180,000). The following scenario is based on these circumstances.

An investor has purchased a property for $420,000 and is receiving $490 per week in rent for a total income of $25,480 per annum. The estimated expenses for the property include interest, rates and management fees, which total $32,000 per annum. The following scenario shows the investor’s cash flow with and without depreciation.

A typical $420,000 unit will depreciate around $11,500 in the first full financial year.

Scenario 1 – Without a depreciation claim:

Scenario 2 – Including an $11,500 depreciation claim:

In this example the investor uses property depreciation to go from a negative cash flow position, paying out $79 per week, to positive cash flow, earning $3 per week on the property. By claiming depreciation this investor will save $4,255 for the year.

BMT Tax Depreciation offer obligation-free advice about a property’s depreciation potential. Let BMT Tax Depreciation show your clients how they can take full advantage of all the available tax benefits on investment properties and improve their cash flow each financial year.

Why choose a quantity surveyor?

Investment property owners should contact a specialist quantity surveyor like BMT to prepare their tax depreciation schedule to ensure benefits are maximised. Quantity surveyors have specialised knowledge on what to claim to ensure nothing is missed and know how to maximise available returns for investors.

Quantity surveyors are one of the few professionals recognised to have the appropriate construction costing skills to estimate building costs for depreciation. Quantity surveyors are qualified under the tax ruling 97/25. They also have access to the latest information through their affiliations with industry regulating bodies.

A detailed tax depreciation schedule prepared by a quantity surveyor such as BMT Tax Depreciation should include:

•   method statement

•   detailed diminishing value, pooled items and prime cost schedules

•   diminishing value and prime cost comparison tables and graphs

•   capital allowances available

•   forty year forecast

•   evaluation of common property for strata or community title properties

•   schedules based on the proportion of ownership for properties with more than one owner

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