What is Property Tax Depreciation?
When it comes to your investment property, these items are classified as either Plant and Equipment or Capital Works. The wear and tear of either plant and equipment or building in an investment property is called tax depreciation. Depreciation that you as an investor can claim as tax deductions enabling also increased tax refunds.
The ATO prescribes two methods—the prime cost method and the diminishing value method—both of which can be used to claim depreciation on your property.
A Duo Tax Depreciation Schedule is an ATO complying document that consists of 2 parts:
1. Capital Works
Also known as: Division 43 (ATO Term) | Building Write-Off | Building Allowance
Capital works, which are eligible for capital works deductions, refer to the items that make up the building and those that are fixed to the building.
Here are some items you could depreciate part of the building:
Residential
Commercial
Does my building qualify for (Division 43) capital works tax deductions?
Capital works refer to the items that make up the building and those that are fixed to the building.
- When was your building built?
- What type of building do you own or lease?
Using these two key pieces of information, we can deduce approximately how much your brand new or second hand property can claim on construction costs.
How to Calculate Capital Works Depreciation Rate
| Construction Year | 21 Aug 1979 | 20 July 1982 | 22 Aug 1984 | 18 July 1985 | 16 Sept 1987 | 27 Feb 1992 to Present | |
|---|---|---|---|---|---|---|---|
| Structural Improvements | 2.5% | ||||||
| Residential | 4% | 2.5% | |||||
| Offices, Warehouses & other Commercial | 2.5% | 4% | 2.5% | ||||
| Manufacturing | 2.5% | 4% | 2.5% | 4% | |||
| Hotels, Motels & Guest Houses | 2.5% | 4% | 2.5% | 4% | |||
| Key: | 2.5% | 4% |
|---|
2. Plant & Equipment
Also known as: Division 40 (ATO Term), Depreciating Asset, Capital Allowance
Items that are easily detachable from the property generally include motorised items with a shorter expected life span.
Plant and Equipment assets differ in tax depreciation rates for both commercial and residential properties. They depend on the ATO’s Asset Effective Life Schedule, which guides how many years the ATO feels an asset may wear out.
These assets are eligible for house depreciation deductions, allowing investors to claim tax deductions for the wear and tear of income-producing buildings and their assets over time.
Some items that are considered plant and equipment:
Residential
Commercial
There are 2 questions we always ask an investor to answer this one.
- When were your assets installed?
- What type of assets do you own or lease?
Legislated Changes to Property Tax Depreciation
When Can You Claim Property Depreciation?
If any of the following scenarios apply to you, you may be eligible for property depreciation benefits:
- Brand new residential properties
- Buildings that still qualify for building depreciation (see division 43)
- Second-hand properties that have had substantial renovations
- Second-hand properties that have had minor renovations
- Investors that purchase property in Managed Funds
- Corporate entities that buy properties (e.g. Pty Ltd Company)
- Second-hand property owners who purchase new plant and equipment
- Owners who switch from Principal Place of Residence (PPOR) to rental properties prior to 1st July 2017
- Residential investment property owners who claim tax depreciation deductions to maximise cash flow
- You own a property that is not residential (commercial, manufacturing or motels)
If you are unsure whether you qualify, it is best to speak to one of our experts.
