What is Tax Depreciation?
Tax Depreciation in Summary
As a building gets older and the items within it wear out, their value begins to depreciate. The Income Tax Assessment Act 1997 enables a property investor (of any property type that is used as an income generating asset), to obtain a tax depreciation schedule to claim this loss in value as a tax deduction for each financial year, over 40 years of ownership.
A tax depreciation schedule is a report that breaks down the depreciable assets of an investment property including the building itself. It may be used to enable property investors to claim back a portion of the costs for eligible assets.
These eligible assets fall into two divisions:
- Capital Works: Construction costs of the building itself, such as concrete, brickwork, foundations etc.
- Plant and Equipment: Items within the building like ovens, air conditioners, carpets, blinds etc.
There are two methods for depreciating assets:
- Prime cost
- Diminishing value
The prime cost method depreciates assets equally over its effective life. This differs from diminishing value as this method assumes the value of the depreciating asset declines in value each year, resulting in higher deductions in the first few years. Our reports include both methods so that you can decide on the most beneficial one for you with your accountant.
Those properties which were purchased after 15th November 2017 benefit the most from depreciation as they are unaffected by recent regulation changes. However, properties purchased prior to this date can still benefit.
If you have purchased your investment property and have yet to claim deductions, a tax depreciation schedules entitles you to back-claim up to 2 tax returns.
For more information check out our blog here.
Previously Used Assets and Depreciation
The Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 was passed on the 15th of November 2017. This new bill includes changes to the Income Tax Assessment Act 1997. The new legislation denies successive owners (those who purchase a second-hand residential investment property) who have exchanged contracts after 7:30pm on the 9th of May 2017 will not be able to claim tax depreciation on existing plant and equipment assets under Division 40. However, exceptions do apply.
Those who are unaffected by the changes are:
- Owners of brand-new residential properties
- Residential property investors who exchanged contracts prior to 7:30pm on the 9th of May 2017
- Substantially renovated properties
- Non-residential / commercial properties
- Public unit trusts and managed investment trusts
- Corporate tax entities including properties held under company entities
- Superannuation plans (other than self-managed super funds that hold residential property)
- The amendments do not affect deductions that arise in the course of carrying on a business
Substantially Renovated Properties
As you can see, property investors who have carried out substantial renovations on their property can still claim tax depreciation as usual. Substantial renovations include structural and non-structural additions, changes or upgrades where all or most of the building has been substantially removed or replaced.
Types of renovations that do not qualify for dedications are:
- Some rooms upgraded
- Curtilage work associated with the renovations, but not directly attributable to the building itself
- Additions that are undertaken with renovations. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises
Non-residential / Commercial Properties
Our tax depreciation schedules are not limited to only residential investments. Commercial or industrial properties that are used for income producing purposes are entitled to claim tax depreciation.
Split Ownership Reports
Where there are multiple owners of a particular property, each can claim their own share of tax depreciation. This means producing a split report which increases the immediate write-off and low-value pooling amounts claimable by each owner.
Immediate write-off example:
In the case where there is just one owner, they can claim an immediate
write-off for assets with an opening value of $300 or less. However, when an
investment property is co-owned by two parties with a 50:50 ownership, a split
report allows the owners to each claim an instant write-off for items less than
$600 in total value. This is because after the split, the opening value for these
assets fall below the $300 limit.
Low-value pooling example:
Where an owner’s interest in an asset is less than $1,000, these items qualify
to be placed in a low value pool and they can be claimed at an increased rate. In
a situation where an ownership is split 50:50, the owners will qualify to pool assets
costing less than $2,000 in original value to the low-value pool.
Request a copy of our white paper today for a more in-depth understanding of tax depreciation, substantial renovations, and the changes passed by Parliament that are in effect since 2017. It is a very useful resource to answer all your tax depreciation needs. Just fill in the fields below: