What is Property Tax Depreciation?
Depreciation is the wear and tear that occurs as things get older. As items get older, the value of these items also decrease in value. This is called 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.
To calculate your depreciation deduction, we apply general depreciation rules unless your asset is eligible for the instant asset-write off or simplified depreciation rules for small business.
The ATO prescribes two methods – prime cost method or diminishing value method. Both that can be used to claim on your property depreciation.
1.
What is Capital Works (Division 43)?
Also referred to by the Australian Tax Office as Division 43, it is 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 |
|---|---|
| Built-in wardrobes | Built-in workstations |
| Toilets and vanities | Car parking space |
| Basins and sink | Glass partitions |
| Concrete slab | Kitchenette |
| Retaining wall and fences | Steel-framing of warehouse |
| Timber framing |
Does my building qualify for (Division 43) capital works tax deductions?
There are 2 questions we always ask an investor to answer this one.
- 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.
Duo Tax have developed an easy guide to refer to check whether your property qualifies for Capital Works:
Capital Works Depreciation Rate
(Based on Construction Commencement Year)
| 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.
What is Plant and Equipment (Division 40)?
Items that are easily detachable from the property and generally these include items that are motorised and have a shorter expected life span.
Plant and Equipment assets are differing in the rates of tax depreciation for both commercial and residential properties and is dependent on the ATO’s Asset Effective Life Schedule which gives guidance as to how many years the ATO feels an asset may wear out.
Plant and equipment assets offer you accelerated levels of property depreciation due to them in nature being faster wearing when compared to the bricks and mortar of your building. That means you as an investor can claim more immediately tax depreciation, typically within the first 5 years. The ATO then allows quantity surveyors to assess the value of these assets to include into your tax depreciation schedule.
Some items that are considered plant and equipment:
| Residential | Commercial |
|---|---|
| Oven | Fire hydrant booster |
| Rangehood | Billi hot water unit |
| Air-conditioning units | Door closers for door struts |
| Smoke alarms | Coffee machine |
| Down lights | Warehouse cranes and hoists |
| Electric garage door & remotes |
There are 2 questions we always ask an investor to answer this one.
- When was your building built?
- What type of building do you own or lease?
Legislated Changes to Tax Depreciation in a nutshell
Property investors who sign the contract for a purchase of a second-hand residential after 7:30pm on 9th of May 2017, are not eligible to claim property depreciation on plant and equipment (division 40). These investors are still able to claim tax depreciation on brand new plant and equipment like carpet and air-conditioning units.
In what scenarios are you eligible to claim property depreciation?
- 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 properties owners who purchase new plant and equipment
- Owners who switch from Principal Place of Residence (PPOR) to rental properties prior to 1st July 2017
- 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 on 1300 185 498.
The majority of our investors claim an average of $7,500 on tax depreciation for their tax return in their first year alone.
