Depreciation
[Di-pre-she-a-shun]
noun
An accounting method used to allocate the cost of a tangible or physical asset over its useful life.
Why do you need a property depreciation report?
As a property investor, you will want to maximise the return on your investment (ROI), improve your cashflow and reduce your tax expense all within the law. By having Write It Off complete a property depreciation report for you, the total expenses claimable on your tax return are significantly increased and therefore reduce your taxable income. This has the positive effect of greatly reducing your tax obligation and boosts your cashflow while ultimately increasing your ROI.
General Depreciation Rules
As a general rule, depreciation is available to any property owner who obtains assessable income by way of rent from an investment property.
A depreciation deduction acts by reducing your taxable income and, therefore, generating a greater return on your property investment.
Who can use a depreciation report?
Anyone wishing to lodge a tax return with rent from an investment property as part of their income. It provides you with a legitimate tax deduction that has the effect of reducing your taxable income and thus reducing the amount of tax payable.
How does it improve your tax situation and/or your cashflow?
Below we provide a brief calculated example of using depreciation as a tax deduction and how it improves your tax situation.
Note: this example is based on an individual tax payer and is for illustrative purposes only. In every situation professional tax advice should be obtained from your accountant or your tax adviser.
Example of a owners tax return outcome.
Income (both rental and wage) in the first column, second column with a depreciation claim and the third column where clearly no depreciation was claimed.
This owner would be worse off by $4,069.00 if they had not claimed depreciation.
It is important to note that this example is for the first year only and does not take into account the benefits of future depreciation claims over a potential 40 years.
ATO rules for Capital Costs
Capital costs or construction cost is the cost to build, extend or renovate a building (Division 43). It does not include the cost of the land, demolition expenses incurred on removing existing structures, the initial costs to clear the land or soft landscaping such as trees or woodchip or grass. Also no value is allowed to be attributable to your own personal labour if for example you painted the building yourself.
Rates of depreciation are determined by the type of construction and the year in which it was built. Generally speaking any residential investment property built after 18th July 1985 can be depreciated at 2.5% (or 4.0% in some cases if construction falls in certain dates).
Capital works deductions are certain types of construction expenditure on your residential investment property.
Deductions that apply to capital works can be:
A building or extension;
Alterations – kitchen or bathroom; other structural improvements – paving, pergola, driveway, retaining wall or fence.
ATO rules for Plant & Equipment
Plant and equipment (Division 40) is a term encompassing items such as curtains, kitchen stove/oven, carpet and vinyl floor coverings and, where applicable, loose furniture such as beds, tables or chairs.
The depreciation of items of plant and equipment is calculated using the effective life of the asset. Generally speaking, the effective life of any depreciating asset is the length of time (in years) the asset can be used to produce taxable income.
Rental Properties, repairs, maintenance and capital expenditure
What’s the difference between capital costs, fixtures & fittings and repairs?
As explained above, capital costs (also known as construction costs) is the building itself and fixtures that form part of the building.
Fixtures and fittings
Fixtures and fittings (also known as plant, equipment or articles) are generally removable items sitting in the building that if removed would not drastically change the make up of the building or render the building incomplete. eg: Carpet.
Repairs and maintenance has sometimes been a bit confusing to tax payers. You have to be careful when considering whether expenditure is a repair or an improvement to the property. One easy point to remember when trying to determine this is whether or not you have repaired an item to bring it back to its original condition (or working order) or have you improved the item beyond its original condition. Eg: replacing a rotted piece of timber on your pergola is a repair but knocking down the pergola and replacing the entire structure is an improvement.
Another example is replacing some fence pailings or replacing the whole timber fence. The first is a repair and the latter is considered an improvement even though you are just restoring the fence to it’s condition. This is because the ATO consider this as a completely new asset and must be depreciated. Additionally, replacing an entire section of the fence would also be considered an improvement and is therefore a depreciable cost.
Remember: Repairs = immediate tax deduction. Improvements = Depreciable over time.
Confused? Leave it up to us because we have a good handle on this and will take care of everything.
Common Property
Common Property is defined in ATO ID 2003/229 as ‘that part of a strata plan not comprised in any owner’s lot and includes both fixed and moveable property and facilities intended for common use. The common property may include depreciating assets and buildings and other structures’.
Assets forming part of ‘common property’ are depreciable. A depreciation schedule from Write It Off will include any depreciable amount attributable to common property.
The following has been written assuming you need to lodge an Australian income tax return. The reasons you would need to lodge a tax return in Australia are long and varied and depend on individual circumstances. Generally speaking, if you earn income within Australia there is a good chance you need to lodge a return with the ATO. This also includes rental income from an investment property and having a professionally prepared rental property depreciation report will help you reduce the amount of tax you have to pay.
What happens if you have an investment property that is located outside of Australia?
Though tax law varies across different countries, you are generally still liable to pay tax in Australia on a foreign sourced income and therefore the Australian tax rules apply.
If you receive rental income from an overseas investment property, you will need to declare it on your Australian tax return, even if you have already paid tax on that income in another country. If both countries have taxation rights on that income, you may be eligible for a foreign income tax offset whereby double taxation can usually be avoided and you can reduce your overall tax liability. In order to be entitled to the offset, you must have actually paid an amount of foreign income tax and the offset can only be claimed after this has occurred. There is no requirement that the entity claiming the Foreign Tax Offset must be an Australian resident. Therefore a non-resident could technically claim the offset.
From 1 July 2008, if your overseas property is negatively geared you may use this “loss” against any Australian sourced income. It is important to remember that what you can claim as a deduction in Australia is not necessarily the same as what you can claim in other countries so it may be wise to consult a local taxation professional.
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