Tax Depreciation Overview
Tax depreciation is a powerful strategy for property investors to maximise tax savings and enhance cash flow by claiming depreciation deductions on income-producing properties.
What is a Tax Depreciation?
Tax depreciation is a tax deduction allowed by the Australian Taxation Office (ATO) for property owners to claim annual depreciation deductions on depreciable property, such as buildings, fixtures, and fittings in rental properties, which lose value over time due to wear and tear, reducing taxable income by accounting for this decline.
Example: If you earn $80,000 in rental income and claim $10,000 in depreciation expense, your taxable income is reduced to $70,000. This lowers your tax liability, potentially increasing your tax refund and improving cash flow.
Benefits of Claiming Tax Depreciation
Maximise Tax Deductions
By reducing taxable income, depreciation allows investors to keep more money in their pocket each year
Boost Cash Flow
Depreciation ensures property owners claim the full value of wear and tear on their building and assets
Improve Returns on Investment
Lower tax liabilities translate into stronger overall returns from the rental investment property
What Can You Claim?
The ATO specifies two categories for depreciation deductions: Division 40 (plant and equipment, e.g., carpets, ovens, air conditioners) and Division 43 (capital works, e.g., walls, roofs, driveways).
Division 40
Division 40, also called Plant and Equipment Assets, covers removable or mechanical assets in your rental property, which are not part of the building’s structure. Investors can claim depreciation deductions for their wear and tear over their effective life.
Example Assets include:
- Carpets, blinds, and curtains
- Ovens and dishwashers
- Air conditioners and hot water systems
Division 43
Division 43, also called Capital Works, covers fixed structural elements of your rental property, such as walls, roofs, and driveways. Investors can claim depreciation deductions against their income tax for the wear and tear over a longer recovery period.
Examples include:
- Walls, ceilings, and roofs
- Built-in wardrobes and cupboards
- Driveways and retaining walls
3 Easy Steps to Claim a Depreciation
To claim depreciation, engage a qualified Quantity Surveyor in Australia to prepare a tax depreciation schedule. Duo Tax creates ATO-compliant reports, enabling you to maximise your tax refund on taxable income in three simple steps.
Step 1
Qualify your Property
Contact us and we will ask you a few simple questions to qualify your investment property.
Step 2
Order a Report
Order over the phone or via our online form and we will begin preparing your report.
Step 3
Claim Deductions
Within approx. 5 business days your report will be delivered to you and your accountant.
💡Quick Tip: Prepare your depreciation schedule early so you can start claiming deductions sooner.
Order a Depreciation ScheduleProperty Depreciation Case Studies
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Frequently Asked Tax Depreciation Questions
Is it worth claiming depreciation on rental property?
Yes. Claiming depreciation on your rental property lets you deduct the decline in value of assets like building costs, fixtures, and fittings, which can reduce taxable income and improve cash flow.
How many investors claim a tax depreciation on rental property in Australia?
Approximately 40% of property investors in Australia claim a tax depreciation schedule to maximise their tax deductions, though many still miss out due to lack of awareness.
Can I claim depreciation on an old house?
Yes, you can claim depreciation on an old house in Australia for capital works (e.g., structural elements) if it’s an income-producing property. You can claim capital works deductions for up to 40 years from the construction date for properties built after 15 September 1987. You can claim depreciation on plant and equipment if the items were installed brand new for the tenants to use.
How long can you claim depreciation on a rental property?
You can claim depreciation on a rental property in Australia for the effective life of plant and equipment (typically 5-15 years) and up to 40 years for capital works, as outlined in a tax depreciation schedule.
Do I need a depreciation schedule every year?
No. Once a schedule is prepared, it usually will last up to 40 years from the build date or most recent renovation date.
What method or formula does the ATO use to calculate depreciation?
The ATO uses two main methods to calculate depreciation:
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Prime cost (straight-line) method – Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life).
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Diminishing value method – Base value × (days held ÷ 365) × (200% ÷ asset’s effective life).
Both methods are based on the asset’s effective life, which determines how long it can be used for income-producing purposes.
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