Five Depreciation Points Every Property Investor Needs to Know

With the end of financial year right around the corner, property investors are thinking about how they can maximise their tax returns when they complete their annual tax assessment. One way investors can become more prepared for tax time and increase their deductions is to claim property depreciation.

Australian Taxation Office (ATO) legislation allows investment property owners to claim a deduction due to the wear and tear of a building structure and its fixtures over time. This claim is called depreciation. Depreciation is considered a non-cash deduction, meaning investors do not need to spend any money to be able to claim it.

Every property investor should have a tax depreciation schedule compiled by a specialist Quantity Surveyor. The Quantity Surveyor will visit the property and then prepare a report which will outline all of the depreciation deductions available for the investor to include in their annual tax assessment with their accountant.

The following list of points will answer some of the most common questions asked by property investors.

1. No property is too old

An investment property does not have to be new. Both new and old properties will attract some depreciation deductions. One common myth is that older properties will attract no claim. It is worth making an enquiry about any property.

If a property owner has not been claiming depreciation or maximising their deductions, the previous two years tax returns can generally be adjusted and amended.

2. Deductions are available for forty years

The Australian Taxation Office (ATO) has determined that any building eligible to claim the building write-off allowance has a maximum effective life of forty years. Therefore, investors can generally claim up to forty years depreciation on a brand new building, whereas the balance of the forty year period from the construction completion date is claimable on an older property.

3. Claim renovations completed by the previous owner

Any renovations completed, including those completed by a previous owner, will be discovered during a site inspection on the property. A Quantity Surveyor will then estimate the deductions available from the assets or structural additions and calculate the depreciation accordingly.

Renovations can include items which are not obvious, for example brand new plumbing, water proofing, electrical wiring or a pergola. To be eligible for a capital works depreciation deduction (building write-off), the construction must have commenced within the qualifying dates.

4. There are two main areas to a property depreciation schedule, the plant and equipment and the capital words deduction

Plant and equipment assets are items which can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Items which are mechanically or electronically operated are considered plant items, even though they can be fixed to the structure of the building. These assets depreciate based on their effective life as set by the ATO.

Some examples of plant and equipment items include hot water systems, carpets, blinds, ovens, cooktops, rangehoods, garage door motors, door closers, freestanding furniture and air-conditioning systems.

The capital works deduction is a deduction for the structural element of the building. It is based on the historical costs of the building and includes materials such as bricks, mortar, walls, flooring and wiring. There are restrictions based on the construction date of the property for capital works claims.  As a general rule, property owners can only claim capital works deductions on residential buildings in which construction commenced after the 18th of July 1985. For commercial properties, property owners may only claim capital works deductions on properties in which construction commenced after the 20th July 1982. Owners of older properties constructed prior to these dates may still be entitled to claim capital works deductions on any more recent renovations.

5. Use a qualified professional

Quantity Surveyors are qualified under the tax ruling 97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation schedules. They are affiliated with industry regulating bodies and gain access to the latest information and resources through their accreditations.