Tax Depreciation - An Investors Delight!

If you own an investment property then the Australian Taxation Office (ATO) will usually allow you to claim a tax deduction for depreciation.

Depreciation of investment properties include:

As a general rule any property constructed after 18 July 1985 (residential) and 20 July 1982 (non-residential) is eligible for capital works allowance;
If refurbishment or renovation works have been undertaken since 18 July 1985 (residential) and 20 July 1982 (non-residential), any building will be eligible to claim the capital works allowance (Division 43), as well as any plant and equipment deductions.
Structural improvements (including fencing, paving, pergolas, garden sheds etc) constructed after February 1992 will attract the capital works allowance. Soft landscaping (including turf, dirt and gravel) can not be claimed.

The ATO has determined that any new house, from the time construction is completed, is eligible to claim a 40-year depreciation at 2.5 percent. When purchasing older houses, the depreciation will be the balance. So if you purchase a house that is 10 years old, you can only claim depreciation on the property for the remaining 30 years.

There are two different ways to calculate depreciating value. The first is Diminishing Value (DV) and the other is the Prime Cost Method (PCM). For short-term investors the best option is generally Diminishing Value.
Depreciation calculated using DV allows investors to claim a greater proportion of the depreciation of the property in the early part of the effective life of the investment. This works well, when, for example, a property is bought as an investment, not a residence. It gives the investor more money upfront but only for a few years.
If, on the other hand, you are buying a property to live in and plan to keep it for many years to come you may prefer to apply the prime cost method of assessing depreciation. This method allows the owner to claim depreciation
steadily over many years. You get a smaller sum back but over a longer period of time.

To get the maximum deduction available to you, a Tax Depreciation Schedule will need to be prepared. This schedule (TDS) lists all the various elements of a property and estimates how much wear is left. A dollar value is then given to the assessable property and an estimate is made of percentage of wear over the life of the property. You get a discount off your tax bill based on the wear percentage for that year.

It’s quite a complex process and requires a professional quantity surveyor. A surveyor will take a look at all of the components of the property and assess them, from bricks to mortar, to frames and windows. A quantity surveyor has extensive knowledge of construction as well as the deductions the ATO allows – it’s their job to make sure every claimable component is included in the depreciation schedule they prepare for you. The report can be prepared to allow a client to easily recover missed depreciation benefits (up to a period of 2 years) amending previous tax returns.

If you would like more information about this, please contact us on 02 4365 0377 or info@trilogygroup.com.au