15 December 2020

Why a Tax Depreciation Schedule is Essential For Every Property Investor

Written by Tuan Duong
Founder & Director

Did you know that 70% of property investors in Australia don't buy a tax depreciation schedule? 

Depreciation schedules are one of the most effective but underused tools available for property investors 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?

In this article, we’ll breakdown everything you need to know about tax depreciation schedules so that you can maximise the tax benefits available to you through your investment property.

What Is Tax Depreciation?

Before delving into what a 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 properties, to claim the depreciation as a tax deduction.

There are two types of depreciation deductions in the space of property investing, namely:

  • Division 43 - Capital Works Deductions

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.

  • Division 40 - Plant and Equipment

The term “plant and equipment” refers to the fixtures and fittings that are found within the building. 

These are generally known as easily removable assets and include items such as carpets and air conditioning units.

house stacked on top of books and coins

What Is a Depreciation Schedule and How Can It Change Your Tax Return?

Simply put, a depreciation schedule is a report that details the tax depreciation deductions you can claim on your property. 

Claiming these tax-deductible expenses involves identifying the value of a property and all its fittings and fixtures. 

The purpose of a 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. 

The schedule document is typically prepared by a professional quantity surveyor, who will inspect your property and assign a value to each asset. 

Example:

In February 2020, Noel purchased his first investment property for $375,000 and immediately rented it out. 

Based on the report he obtained from his Quantity Surveyor 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 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 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

So, 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 depreciation schedule will highlight the capital works deductions he can claim until 2043, provided that he still owns the property and it’s being used to produce income. 

sample report for tax depreciation schedule

The report also charts the loss in value of his plant and equipment assets, such as his air-conditioning unit, over its effective life. Below is a sample of the depreciation process in Noel’s depreciation schedule drawn up by us at Duo Tax:

What Does a Tax Depreciation Schedule Include?

Based on Noel’s example above, a depreciation schedule generally includes the following components: 

  • an introduction to the schedule with a glossary of terms to help you better understand how the schedule works; 
  • a detailed 40-year estimate showing all Division 43 (capital works) depreciable items; 
  • examples of both the prime cost and diminishing value methods of depreciation to help you decide which method is best for your circumstances; 
  • the effective life and prescribe depression rate for all Division 40 (plant and equipment) assets; and
  • a breakdown of the assets that belong to low-value pools as well as those that qualified for an instant-asset write-off. 

You can request a Duo Tax 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. 

How Do You Get a Depreciation Schedule?

To get your hands on a 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 that your property be inspected before producing the 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 depreciation schedule, initially contact a quantity surveying firm 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 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 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!

architect plan of a house

What To Do With the Depreciation Schedule After Receiving It?

Following the completion of your 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.

When Is the Ideal Time to Purchase a Tax Depreciation Schedule?

To maximise your annual deductions, you should order your 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 partial deductions and take advantage of instant asset write-offs. 

What Are the Benefits of a Depreciation Schedule?

The advantages of having a quantity surveyor draw up a depreciation schedule for your property is extensive.  Some of these benefits include:

  • making your first or even your next property a more desirable and attainable option which will essentially help kick start your wealth-building journey; 
  • it can be the difference between having a negatively geared property and enjoying an enhanced cash flow;
  • unlike other property deductions, a depreciation schedule is a once-off cost, and you can claim depreciation deductions without spending money each financial year; and 
  • the schedule is tailored to maximise all the benefits available to you under Australian law for new and older properties. 

What Sets Duo Tax Apart?

For the past five years, the team at Duo Tax have helped thousands of property investors maximise their deductions through the power of 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, is that we offer free immediate and accurate over the phone estimates so that you can decide if it’s worthwhile. We guarantee that you’ll receive your depreciation schedule within ten business days from payment – the fastest in the industry.

Key Takeaways 

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 depreciation schedule from Duo Tax in 3 simple steps: 

  1. Get in touch with us, and we will ask you a few simple questions to see if your property qualifies. 
  2. Order a depreciation schedule over the phone or via our online form, and we will begin preparing your depreciation. 
  3. Within 5-10 business days, your personalised depreciation report will be delivered to your and your accountant.
Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email tuan@duotax.com.au
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