Key takeaways:
- There are two main categories for investment property depreciation – Division 43 (building) and Division 40 (plant and equipment);
- Division 40 assets can be depreciated using either diminishing value or prime cost methods of depreciation;
- Division 43 capital works typically depreciate at 2.5% over 40 years;
- Investors can also utilise immediate write-off, low cost and low value pooling to accelerate depreciation claims;
- Results are most effectively maximised by using a Quantity Surveyor who understands the legislation, can professionally estimate unknown costs and apply the correct methods and rates of depreciation to ensure ATO compliance.
Download a sample depreciation schedule as prepared by Capital Claims Tax Depreciation
Depreciation allows property investors to claim a tax deduction for the wear and tear on their property over time. This article will guide you through the process of calculating depreciation, focusing on Division 40 and Division 43 of the Income Tax Assessment Act 1997, itemising individual assets, and using the prime-cost and diminishing value methods. We’ll also cover low-cost and low-value pooling, the importance of understanding relevant legislation, and the role of quantity surveyors in ensuring accurate and maximised deductions.
Understanding Depreciation
Depreciation is the decline in value of an asset over time due to wear and tear. For investment properties, the Australian Taxation Office (ATO) allows investors to claim this decline in value as a tax deduction. There are two main categories of depreciation for investment properties:
- Division 40 (Plant and Equipment): This includes items that are easily removable or mechanical in nature, such as appliances, carpets, and air conditioning units.
- Division 43 (Capital Works): This covers the building structure and permanently fixed items, such as walls, doors, and roofs.
Division 40: Plant and Equipment
Example: Let’s say you purchase an investment property with the following brand-new plant and equipment items:
- Air conditioning unit: $3,000
- Carpet: $2,000
- Dishwasher: $1,000
These items can be depreciated using either the prime-cost method or the diminishing value method.
Prime-Cost Method for calculating depreciation
The prime-cost method spreads the depreciation evenly over the asset’s effective life. For example, if the air conditioning unit has an effective life of 10 years, the annual depreciation would be:
Diminishing Value Method for calculating depreciation
The diminishing value method accelerates depreciation, allowing for higher deductions in the earlier years. The formula is:
For the air conditioning unit in the first year:
Division 43: Capital Works
Example: Suppose the construction cost of your investment property is $200,000. Under Division 43, you can claim 2.5% of the construction cost per year for 40 years.
Low-Cost and Low-Value Pooling
Assets valued at $300 or less are eligible for immediate write-off in the first year, and low-value assets (with a written-down value of less than $1,000) can be grouped into a low-value pool, which allows for accelerated depreciation.
Example: If you have a microwave costing $400, it can be added to the low-value pool and depreciated at 18.75% in the first year and 37.5% in subsequent years.
Importance of Legislation
Understanding the relevant legislation is crucial for accurate depreciation calculations. Different building types, uses, ownership structures, and whether the property is new or second-hand can affect depreciation claims. For instance, second-hand properties purchased after May 9, 2017, have restrictions on claiming depreciation for previously used plant and equipment.
Role of Quantity Surveyors
Quantity surveyors are one of the few professionals recognised by the ATO as qualified to estimate historical construction costs and plant and asset values. They play a vital role in ensuring that depreciation claims are accurate and maximised. A tax depreciation specialist can help identify all depreciable items and apply the correct methods and rates.
Why Choose Capital Claims Tax Depreciation?
Capital Claims Tax Depreciation is a leading provider of depreciation schedules in Australia. They offer:
- Expertise: Their team includes certified and experienced quantity surveyors who specialise in tax depreciation.
- Accuracy: They ensure all deductions are accurately calculated and compliant with ATO guidelines.
- Maximised Deductions: They identify all possible deductions to maximise your tax benefits.
- Comprehensive Reports: Their reports are detailed and easy to understand, making it simple for you and your accountant to use.
In summary calculating depreciation on an investment property involves understanding Division 40 and Division 43, itemising individual assets, and choosing the appropriate depreciation methods. It’s essential to be aware of the relevant legislation and to use a qualified quantity surveyor to ensure compliance and maximise deductions. Capital Claims Tax Depreciation stands out as the best option for a depreciation schedule in Australia, providing expertise, accuracy, and maximised deductions.
By following these guidelines and working with professionals, you can effectively manage your investment property’s depreciation and enhance your overall return on investment. Contact our depreciation experts on 1300 922 220. Get started today and ensure you’re getting the most out of your investment!
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