When you invest in a new property you can claim depreciation on both plant and equipment and capital works. With few exceptions, investing in old property entitles you to claim only for capital works. Here’s how it works;
What is property depreciation?
Property investors can claim depreciation on their investment property. In accounting language, depreciation can be described as the reduction in the value of assets over time.
In the same way as your motor vehicle will depreciate over time, so too will the property, along with the fixtures such as blinds and light fittings. As a property investor, you can claim this reduction in value from your tax liability when you submit your tax returns.
Types of depreciation
There are two types of depreciation;
- Plant and equipment Division 40 – includes all the fixtures and appliances such as curtains, fans, appliances, carpets and air conditioning. Each of these assets has a predetermined lifespan, based on its income-producing ability.
- Capital works allowance or building write off Division 43 – includes all parts of the structure that cannot be removed such as windows, walls and foundations.
The main differentiator between the two items is the rate at which each is depreciated. You can claim for the building structure at 2.5% over a 20-year period. The carpets in a new home, on the other hand, will depreciate at 20% over 10 years.
It is important that the investor correctly classifies the assets. This is sometimes difficult and confusing. An air-conditioner, for example, falls under plant and equipment so it depreciates at an annual rate of 20%. The air ducting, however, falls capital works so you can only take off 2.5% in depreciation for tax purposes.
How to get a statement of allowances
You will have to employ a qualified Quantity Surveyor to make a detailed statement of allowances for your investment property. He or she will perform a detailed analysis of the construction. They will ensure that everything is properly documented for your accountant. A detailed analysis can save you thousands of dollars in tax every year, so it is worth getting it right from the start.
How different is the depreciation allowance on a new property compared to an old property?
Buying a new investment property
If you bought your new property after the 9th May 2017, for tax purposes, you can almost certainly claim depreciation on both the building and the plant and equipment that it contains. This means that investors can now claim a higher tax deduction than was previously possible.
Buying an older investment property
If you have invested in an older property, you can usually only claim depreciation on the Capital Works. You can, however, also claim for any new equipment and fixtures that you install in the property once it earns an income for you.
It is also possible to claim for any substantial improvements that the previous owner own made for the purpose of selling. Your accountant should assist with this if you feel that you have a claim.
Other claimable expenses
The ATO allows you to claim expenses in the year that they occur for any repairs and maintenance, management and interest costs pertaining to the property. If your interest costs exceed the income from the property you may deduct the rental from other businesses expenses. You will have to consult your accountant about this, as all businesses are different.
Apart from depreciation, there are other expenses that you may deduct. Listed below;
- Body corporate charges
- Cleaning and gardening
- Agent’s commissions and fees
- Pest control
- Insurance
- Rates and utilities
- Advertising
- Interest on property that is rented out or up for rental
- Repairs and maintenance
In summary
All property investors can claim depreciation for tax purposes. Those who buy new a property have a higher claim than those who buy older properties. This is because they can claim capital works and plant and equipment. Take the advice of an accountant to assist incorrectly