Did you know that 70% of investors in Australia don't buy a tax depreciation schedule for their investment properties?
Depreciation schedules are one of the most effective but underused tools available to a property investor to maximise their returns.
When you think about the fact that depreciation is the second-highest tax deduction on your property after interest on your loan, it's unbelievable how much investors are leaving on the table.
But what exactly is a depreciation schedule? And how can you benefit from it?
We’ll break down everything you need to know about tax depreciation schedules so that you can maximise the tax benefits available to you through your investment property.
Before delving into what a tax depreciation schedule is, it’s important to understand property tax depreciation.
As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.
The Australian Tax Office (ATO) allows property investors, who generate income from their investment property, to claim the property depreciation as a tax deduction.
There are two types of depreciation deductions in the space of property investing, namely:
Division 43 Deductions refer to the depreciation of the structure of the building. The structure of a residential building, if constructed after September 1987, generally has an effective life of 40 years.
You can claim a capital works deduction on construction costs too.
The term “plant and equipment” refers to the fixtures and fittings that are found within the building.
Plant and equipment depreciation on these easily removable assets include items such as carpets and air conditioning units.
Simply put, depreciation schedules are reports detailing the tax depreciation deductions you can claim on your investment property.
Claiming these tax-deductible expenses involves identifying the value of an investment property, what you estimate construction costs to be, and all its fittings and fixtures.
The purpose of a tax depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim for tax depreciation.
The tax depreciation schedule document is typically prepared by a professional quantity surveyor who’s a member of the Australian Institute of Quantity Surveyors. Qualified quantity surveyors will inspect your investment property and assign a value to each asset.
In February 2020, Noel purchased his first investment property for $375,000 and immediately rented it out.
Based on the tax depreciation schedule he obtained from the quantity surveyors at Duo Tax, the construction of his property commenced in March 2003 and was completed in November 2003. The cost of construction was estimated to be $225,000.
The property depreciation schedule outlines that Noel can claim a capital works deduction at a depreciation rate of 2.5% per annum, as the construction of his investment property commenced after 15 September 1987.
In his first year of owning the property, Noel was only able to rent out the property from 1 February 2020 to 30 April 2020, so he can claim a deduction for 90 days:
($225,000 x 2.5%) x (90 days of 366 days in 2020) = $1383.20.
Thus, Noel can claim a capital works deduction of $1383.20 in his 2019-2020 tax return.
As the property was built in 2003, Noel’s tax depreciation report will highlight the capital works deductions he can claim until 2043, provided that he still owns the investment property and it’s being used to produce income.
The tax depreciation schedule report also charts the loss in value of his plant and equipment assets, such as his air-conditioning unit, over its effective life. So, Noel can claim tax deductions for these assets too.
Below is a sample of the depreciation process in Noel’s tax depreciation schedule drawn up by us at Duo Tax:
Based on Noel’s example above, a tax depreciation schedule generally includes the following components:
You can request a Duo Tax property depreciation schedule report sample here. Our depreciation reports are easy to read and provide clear instructions, so it’ll give you a good idea of how your report should look and how to claim depreciation deductions.
To get your hands on a property depreciation schedule simply requires you to get in touch with a quantity surveyor.
To satisfy the requirements set by the ATO, the Australian Institute of Quantity Surveyors requires a property inspection before producing the tax depreciation schedule. Quantity surveyors are one of the few professions recognised by the ATO who can estimate the historical and current costs of a property and its included assets.
If you aren’t sure if you’re able to get a tax depreciation schedule, initially contact quantity surveyors to get a free estimate on what they could claim.
At Duo Tax, our quantity surveyors can conduct some preliminary research using real estate data to find out the type of building, when it was built and the estimated construction cost. This way, you can ensure that you’re satisfied with the result of the depreciation report before committing to purchasing a depreciation schedule.
You can also access tools such as a depreciation calculator to help estimate what you could potentially claim before purchasing a depreciation schedule.
After that, a qualified member of their team will come to the property and note all the depreciable items. Following the inspection, you should expect your tax depreciation schedule within two weeks.
A single schedule provides 40 years of claimable deductions (or the maximum entitled years), so you will only have to have your property inspected once.
The bonus here is that the quantity surveyor fees are a property tax deduction!
Following the completion of your tax depreciation schedule, all you have to do is hand it over to your accountant, and they will submit the results in your tax return each financial year.
To maximise your annual deductions, you should order your tax depreciation schedule before the end of the financial year, which is on 30 June.
Even if you haven’t owned your property for an entire financial year, you should still order your depreciation schedule before 30 June of that year so that you can qualify to claim deductions partially and take advantage of instant asset write-offs.
The advantages of having a quantity surveyor draw up a tax depreciation schedule for your property is extensive. Some of these depreciation benefits include:
For the past five years, the team at Duo Tax have helped thousands of property investors maximise their deductions through our depreciation services and the power of tax depreciation reports. As avid investors themselves, their mission is to help all investors get the most value out of their investments.
With over 30 combined years of experience and a nationwide presence, our Duo Tax process focuses on the most aggressive form of depreciation, which means more cash in your pocket.
What’s more, we offer free immediate and accurate over the phone estimates so that you can decide if it’s worthwhile to order a depreciation schedule and submit a depreciation claim. We guarantee that you’ll receive your depreciation schedule within ten business days from payment – the fastest in the industry.
In most cases, property investors are entitled to tax deductions as part of the wear and tear that occurs on their investment properties.
But so many investors miss out on the opportunity to save thousands of dollars each year because they don’t realise the cash flow benefits of obtaining a depreciation schedule.
Depreciation deductions can significantly reduce your taxable income and help you realise a positive cash flow sooner.
Are you one of the 70% of investors who are missing out?
Obtain your tax depreciation schedule from Duo Tax in 3 simple steps: