By Skye Nicholson
Don’t be another property investor who forgoes thousands of dollars of unclaimed money, simply for being none the wiser! This tax time, we look into claiming depreciation deductions for your investment property.
In recent data released by SQM Research this week, it is noted that the national vacancy rate sits at 2.1%, with Brisbane specifically siting at 2.9% [1]. This reflects 9,331 rental vacancies, and, as a direct result, tenants are more inclined to request rent reductions. At a time where vacancy rates in investment properties are ever-so-prominent and asking rent is decreasing, investors should be maximising tax breaks where possible.
Every investor has an “Investment Property Strategy”, increasing the amount of return you receive on your investment property at tax time is a crucial element to be included in that strategy. While depreciation tax breaks are predominately greater on newer properties, they are applicable for all investment properties and should be incorporated into your Strategy irrespective of a property’s construction date and construction type. The process of claiming depreciation directly improves your cash flow by reducing your taxable income or assessable income, and accordingly, increases the potential to expand your portfolio further.
The table below highlights the average depreciation deduction for investors who requested schedules during the financial year 2015-2016.
AGE OF RESIDENTIAL PROPERTIES SELECTED: 2015-2016 FINANCIAL YEAR [2].
| Description: | Construction dates: | Percentage of total: | Average first full year deduction |
| Old | Pre 1987 | 22.3% | $4,899 |
| Pre 2000 | 1987 – 2000 | 16.9% | $7,543 |
| Up to 15 years old | 2000 – end of 2012 | 26% | $11,303 |
| Fairly new | 2012 – 2015 | 13.3% | $12,316 |
| Brand new | Built after 1/3/2015 | 21.5% | $12,680 |
It is clear that, regardless of the age of the property, it is worthwhile to speak with a specialist quantity surveyor on exactly what can be claimed with respect to your investment property. As demonstrated in the above, residential properties that have been constructed prior to 1987 can receive an average depreciation deduction of $4,899.00 in the first financial year alone. This means investors in those circumstances could pocket roughly $94.00 a week! Even those who have a depreciation schedule set up may be underestimating just how much they could be claiming. We note also, these figures are merely indicative on investors who requested depreciation schedules.
Practical Aspects
Maximising property depreciation requires a thorough understanding of the legislation surrounding depreciation deductions, and how to structure your depreciation report so that deductions are utilised to their full potential. In the following paragraphs, we look into the practical aspects for you.
The Australian Taxation Office (ATO) sanctions depreciation of assets that have “a limited effective life and can reasonably be expected to decline in value over the time it is used” [3]. Further, the two main types of expenses that can be depreciated for investment properties at tax time are as follows:-
- Wear and Tear of Fixtures and fittings – Plant and equipment (Division 40); and
- Capital Works expenses – Capital Works Allowance (Division 43).
The ATO recognises that the ageing of investment properties, and items within the property that suffer wear and tear, cause a decline in overall value. In light of same, the ATO allows investors to claim this financial loss as a tax deduction each financial year against their assessable income.
Noting the above, deductions can only be claimed for the period during the financial year that the property is rented or is available for rent. This means that if you live in a property and intend to rent it out in future, investment property depreciation is not available to you until the property is used specifically for the purposes of rent generation, whereby providing an investment return/benefit to you.
1. Plant and equipment depreciating assets (Division 40).
Division 40 of the Income Tax Assessment Act 1997 (Cth) (“the Act”) provides that an amount that is equal to the decline in value of the “Depreciating asset” is claimable at tax time. As a result, lowering your assessable income, and which in turn provides you with a greater tax return.
In accordance with section 40-B of the Act, “Depreciating Assets are assets with a limited effective life that are reasonably expected to decline in value” [4]. In other words, depreciating assets are plant and equipment items within the property that have a limited “effective life” as determined by the ATO. The depreciation deduction available on that item is then calculated with respect to said effective life.
These items are removable fixtures generally described as ‘not structural’. Items for example include, carpet, blinds, kitchen appliances, light shades, security systems, elevators, air conditioners, hot water systems, etc.
The depreciation deduction available on these items is calculated with respect to the specified “effective life”. Accordingly, this forms one significant aspect of an investor’s depreciation schedule. We refer you to section 40-30 of the Act for a more definitive list of the claimable assets.
2. Capital Works Allowance (Division 43).
Division 43 of the Act, more commonly referred to as “Capital Works Allowance” covers deductions available to investors for fixed items/assets and the structural elements of the property. Essentially, this division provides a system of deducting capital expenditure incurred by the investor in respect of the construction of a building, and other capital works, to lower assessable income, similar to the purposes of Division 40 of the Act.
The age and type of fixed assets and construction determine the allowance provided under the Capital Works Allowance division. This can be complex and we recommend you engage a Quantity Surveyor to provide advice over the allowable deductions.
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[1] Vacancy Rates Steady In May, Asking Rents Dip (2018) Sqmresearch.com.au
[2] Maverick, BMT Quantity Surveyors. 2017. Depreciation data highlights investment trend www.bmtqs.com.au
[3] Guide to depreciating assets 2017, Page 3, Australian Taxation Office, “a limited effective life and can reasonably be expected to decline in value over the time it is used.”
[4] Income Tax Assessment Act 1997 Federal Register of Legislation, Division 40 Capital allowances, Section 40-10, “Depreciating Assets are assets with a limited effective life that are reasonably expected to decline in value.”
