What is tax depreciation?

Find out how tax depreciation works in Australia.

About Tax Depreciation

What is investment property tax depreciation?

Capital allowance and depreciation are some of the largest tax deductions available to property investors.

Watch this short explainer video for a quick introduction to tax depreciation and how it benefits property investors.

Not into video?  Transcript of the video is below.

Video Transcript

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 perspective and in the view of the Australian Tax Office (ATO), 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 you by a quantity surveyor.

A quantity surveyor will provide you with a Capital Allowance and Tax Depreciation Schedule, that you then provide to your accountant when completing your tax return.

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We’ll also include a quote to provide a tax depreciation schedule, and if we can’t guarantee a strong result, we’ll let you know up front and there will be no cost to you.

Calculation Methods

How is tax depreciation calculated?

Depreciation is claimable on both the building (construction costs) of a property, and the assets installed within a property.  

These are also known as Division 43 and Division 40 deductions.

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Division 43 - Building / Construction/ Capital Works

Division 43 includes the built, constructed components of your property.  Some examples include:

  • Roof tiles /colourbond
  • Bricks
  • Framing
  • Weatherboards
  • Retaining walls
  • Concrete structures

Depreciation on a building (Division 43) is calculated using the Prime Cost method of depreciation (see below).

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Division 40 - Assets / Plant & Equipment

Assets, or plant and equipment, also known as Division 40 items are removable assets you install.  Some examples include:

  • Air conditioning
  • Hot water system
  • Cooktop
  • Dishwasher
  • Security system
  • Carpet

Depreciation on assets (Division 40) can be calculated using the Prime Cost or Diminishing Value method of depreciation (see below).

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Prime Cost method and formula for depreciation

The Prime Cost method of depreciation values depreciation as a fixed amount for each year of the effective life of the asset.

For example, the prime cost depreciation rate for an asset expected to last 5 years is 20% of the original cost/value per year.

The formula for depreciation using the prime cost method is:

Asset’s cost X (days held/365) X (100%/asset’s effective life).

Note: “Days held” is the number of days you owned the asset in the income year in which you had it installed ready for use. Days held can be 366 for a leap year.

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Diminishing Value method and formula for depreciation

The diminishing value method assumes an asset loses a higher proportion of it’s value in the earlier years and so allows for higher depreciation deductions earlier on, with annual deductions reducing over time.

The formula for depreciation using the diminishing value method is:  

Base value X (days held/365) X (200%/asset’s effective life).

Days held can be 366 for a leap year.

If you started to hold the asset before 10 May 2006, the formula for diminishing value method is:  Base value X (days held/365) X (200%/asset’s effective life).

The most effective and reliable way to ensure you are claiming the maximum allowable depreciation for your building and assets is to have our expert team produce an ATO compliant capital allowance and tax depreciation schedule for you.

Who Calculates Depreciation

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.

What is Tax Depreciation - what is tax depreciation
What is Tax Depreciation - what is tax depreciation
Expert Quantity Surveyors

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

Reporting of accurate and maximum tax deductions typically requires estimation of historical construction costs (including historical renovation works performed over time), as well as attributing a current value and effective life to many assets (or plant and equipment items). An accountant is not recognised by the ATO to estimate these costs and values and so will not be able to include these deductions in a depreciation schedule that they prepare. In order to report accurate results, this must be done by a quantity surveyor.

For a general estimate of the deductions you could be claiming check out our property depreciation calculator here. Or for a free, personalised estimate for your property specifically enter your details here or contact us on 1300 922 220 today. With offices across Australia from Newcastle to Perth, it’s easy to find the local help you need for your property depreciation requirements.

Additional Questions

Got additional Questions?

Depreciation is a legitimate tax deduction and is included as a property expense assessing the taxable income of your investment property. It has the effect of increasing expenses and reducing taxable income, thereby reducing your tax liability (or increasing your tax refund). A tax depreciation schedule prepared by a quantity surveyor ensures you are claiming the accurate amount of tax deductions.
In most cases investors who purchase second-hand properties after May 2017 can still claim some substantial deductions for capital allowance despite many investors and their advisers believing otherwise. You can read more details about claiming depreciation on second-hand properties here – but the short answer is that most properties, regardless of age still have a depreciable value left to claim as a tax deduction (largely due to the 40 year effective life of the original construction as well as works completed since original construction).

Yes, you can claim tax depreciation on renovations to an existing residential property or commercial building. These types of claims will usually come under capital works (division 43) and/or plant and equipment (division 40). As the conditions of these sorts of projects are highly variable, we encourage you to get in touch with us to have the conversation about how you can maximise your claim.

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