Tax depreciation

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What is investment property tax depreciation?

Every year thousands of property investors pay more tax than they have to because they don’t claim a tax deduction for the depreciation of their investment property.  

Depreciation is an accounting term that refers to the ageing and wearing out of an asset over time, and it is typically one of the largest tax deductions claimable by  property investors.

Even if an investment property appreciates (goes up in value), from an accounting and ATO perspective the building and included fixtures and assets still wear out and diminish in value over time (they depreciate).  This loss in value each year is claimable as a tax deduction. 

Depreciation is claimable as a tax deduction on both residential and commercial investment properties.  The deduction is applied against the property’s income in the same way that other property expenses are e.g. borrowing costs, property management fees, repairs and maintenance etc.  Unlike those expenses, depreciation is a calculated deduction, you don’t have to incur an expense that year in order to claim it, it is calculated for your by a quantity surveyor.

How is depreciation calculated?

Depreciation is calculated in under two separate pieces of tax legislation, Division 43 and Division 40. 

Division 43

Also known as capital allowance, building depreciation.

Division 43 deductions relate to depreciation calculated on the structure of a building. The structure includes such components as bricks, roofing, piers, electrical, plumbing, internal walls, flooring (but not floor coverings such as carpet or floating timber), garages, decking, pools etc – typically works that are “built” into the property and are not removable.

Depreciation for Division 43 is mostly calculated at a standard per annum rate of 2.5% of construction cost (this is not the same as purchase price and purchase price cannot be used for this purpose).  These construction costs also include paid labour and consultants and preliminary fees where they were part of the construction process.

Where the construction cost of a building or additional works is not known, a quantity surveyor is qualified to estimate those construction costs.

Division 43 example

An investor has just added a new deck at their established residential investment property.  The total construction cost of the new deck (including preliminary and consultant fees) was $30,000.  The ATO says that deck will depreciate in value at 2.5% each year.  This means 2.5% of the $30,000 construction cost is claimable as a tax deduction each year for the next 40 years.

Annual tax deduction for depreciation of the deck alone = 2.5% x $30,000 = $750.00

Division 40​

Also known as plant and equipment, fixtures and fittings.

Division 40 deductions relate to the depreciation of fixtures and assets within a property.  These items are not built in, are typically removable and include mechanical and electrical assets.  Examples include hot water system, air conditioners, kitchen appliances, pool pumps, garage door motors, carpet, blinds, light fittings etc.

Depreciation rates for all Division 40 assets vary dependent upon their effective life.  Effective lives are determined by the ATO.  For example, most carpet in a typical investment property has an effective life of 10 years.  This means that the value of the carpet will depreciate over 10 years until it has zero value at the end of the 10th year. 

Division 40 assets can be depreciated using the Prime Cost (or straight line method) or the Diminishing Value method.  A quality depreciation schedule will report the results for each year using both methods so you can apply the best method for your financial scenario.  

Division 40 example

An hotelier has just laid new carpet throughout their establishment at a total installed cost of $40,000.  The effective life of carpet in a hotel is 7 years. Using the Prime Cost method the annual tax deduction for the carpet will be 7% x $40,000 = $2,800.

Using the Diminishing Value method the deductions will start as follows (presuming a full 365 days in the first year):  

Year 1$11,428.57
Year 2$  8,163.27
Year 3$ 5,830.90
Year 4$  4,164.93
Year 5$  2,974.95
Year 6$  2,124.96
Year 7$  1,517.83
Year 8$  1,084.17
Year 9$      774.40
Year 10$      553.15

Can an accountant calculate my depreciation?

An accountant can calculate asset or Division 40 depreciation, but only from fixed, given costs (receipts/invoices).   

To maximise the depreciation deductions available, investors should engage a quantity surveyor to accurately account for both Division 43 and Division 40 depreciation.  Only a depreciation schedule prepared by a specialist quantity surveyor will maximise the depreciation deductions available to investors.

An accountant is not recognised by the ATO as qualified to estimate any construction or asset costs.

How much depreciation could you be claiming on your investment property?

Find out with a free, personalised estimate from our team

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