What is tax depreciation?
Find out how tax depreciation works in Australia
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 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.
For a free estimate of the tax deductions you could be claiming, click on the button below.
Frequently Asked Questions
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.
Division 43 - Building / Construction/ Capital Works
Division 43 includes the built, constructed components of your property. Some examples include:
- Roof tiles /colourbond
- Retaining walls
- Concrete structures
Depreciation on a building (Division 43) is calculated using the Prime Cost method of depreciation (see below).
Division 40 - Assets / Plant and 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
- Security system
Depreciation on assets (Division 40) can be calculated using the Prime Cost or Diminishing Value method of depreciation (see below).
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.
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.
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.
To get an idea of how much you could save, talk to us today. Due to recent changes in legislation we have replaced our online property depreciation calculator with free professional estimates specific to your property address. To get a free, personalised estimate of the deductions you could be claiming 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 and assets.
Doesn’t my accountant already take care of this for me?
Accountants are not qualified to estimate construction costs, which includes more than just materials & construction labour. For example, accountants are not qualified to estimate construction works & associated costs of previous works over the life of the property. Our research shows that depreciation claimed by accountants without the use of a professionally prepared tax depreciation schedule are far more conservative and result in thousands of dollars in lost deductions for the investor. In order to maximise your depreciation claim, you need to have a report prepared by a quantity surveyor.
How does depreciation affect tax?
Depreciation in the value of a building is treated as a reduction in the amount of money against which you would otherwise be expected to pay tax on. With a tax depreciation schedule, you can reduce your exposure to taxation in line with the rate at which your home or commercial building depreciates in value. It’s important to note here that the building and the property it sits on are treated as separate things in this scenario.
Is depreciation still claimable on old or second-hand properties?
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 an in depth answer to this question here – but the short answer is that it is highly unlikely your property is too old to make any gains via claims based upon a tax depreciation schedule.
Can you claim depreciation on renovations?
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.
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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