Depreciation is one of the biggest and most under-utilised claims available to property investors. Many people do not realise the cash flow benefits of obtaining a depreciation schedule which can result in having to pay literally thousands of dollars less tax each year.
Unlike the other deductions related to investment properties (land tax, body corporate fees, repairs & maintenance, property management fees etc.) depreciation is a deduction you can claim without spending money each financial year. Generally, you pay a one-off fee and receive a 40 year schedule that your accountant will utilise every year to legally reduce your taxable income.
Whether your property is positively or negatively geared, depreciation can make a great deal of difference to your tax return (Click here to find out exactly how it works).
When you have a depreciation schedule prepared for your property, it will be split into two categories: capital works and plant & articles. The capital works are the original building cost, any renovations or extensions and generally permanent assets that form part of the building or surrounding structures (eg. fencing, retaining walls, pergolas, paving, sheds etc.) These assets generally depreciate over 40 years and form the ‘backbone’ of the depreciation report. The plant & articles (also known as plant & equipment) are the removable assets such as window furnishings, appliances, carpet, exhaust fans, fire alarms etc. These depreciate at different rates depending on the type of asset and its ‘effective life’ as determined by the ATO. These effective lives usually fall between 5 and 15 years and are the main reason the bigger depreciation claims fall in the early years. (Click here to see a sample depreciation report).
To complete a depreciation report, a qualified building inspector will need to carry out an inspection of your property. During the inspection your property will be measured and all of the depreciable assets will be assigned a value, including the building itself if it is eligible for depreciation (generally speaking this would be anything built on or after 17 September 1987). It is important to note that the values for the building are based on the year of construction and what it would have cost at that time, not what the building would cost to replace. Plant & Article can only be claimed if they were installed by the current owner. Plant & Article assets installed by previous owners are no longer depreciable if the property was contracted for purchase on or after May 9 2017. This is a result of 2017 Federal Budget changes.
Schedules are tailored to maximise the benefits available under Australian tax law including immediate write offs, low value pooling whilst taking advantage of multiple owners and higher thresholds. Once the inspection is completed the information is compiled into the report which if required can be provided directly to your accountant in a format that they can import into their software. There is very little that you actually need to do and the benefits can be enormous.
Many people are under the misconception that depreciation is only claimable on new properties and this is simply not true. There are a few cases where it is not worth getting a depreciation schedule done but if some work has been done to an older property then it is likely it would be a valuable option to get a depreciable report completed. If you’re not sure you can discuss your concerns directly with Write It Off. We also offer a minimum claim guarantee to ensure that the report is worth your while.