If you’re the owner of an income producing property, then you are eligible to claim tax deductions for a number of expenses involved in holding the property.
Most investors are aware of some of the deductions they are entitled to, such as property manager’s fees, council rates and any repairs and maintenance costs. But many investors remain unaware of property depreciation and thus miss out on the valuable returns these deductions can provide them with when it comes time to complete their annual income tax return.
To help investors to understand property depreciation a bit better, let’s look at some of the key points of this tax deduction.
What is depreciation?
Over time, any building and the assets contained within it will experience wear and tear. Legislation allows the owners of any income producing property to claim this wear and tear as a tax deduction called depreciation. Unlike other expenses involved in holding a property, such as repairs and maintenance for instance, an investor does not need to spend any money to be eligible to claim it. For this reason, depreciation is often described as a non-cash deduction.
Types of depreciation deductions available
The Australian Taxation Office (ATO) clearly defines two types of depreciation allowances available for property investors:
- Division 43 capital works allowance
- Division 40 plant and equipment depreciation*
The capital works allowance refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.
As a general rule, any residential building where construction commenced after the 15th of September 1987 will entitle their owner to capital works deductions at a rate of 2.5% per year for up to forty years.
Owners of older buildings constructed prior to 1987 should still find out what deductions are available, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner.
Plant and equipment depreciation*, on the other hand, refers to the deductions an investor can claim for the wear and tear that occurs to the easily removable fixtures and fittings found within the property.
There are more than 6,000 different assets recognised by the ATO which an investor can claim depreciation deductions for. Some examples include the carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans.
Unlike structural items, no date restrictions apply when claiming depreciation on plant and equipment assets as long as the owner is eligible to claim this deduction (see * for further details). Each of the assets is assigned an individual effective life and depreciation rate by which depreciation should be calculated.
*Under proposed changes outlined in draft legislation (section 2 of Treasury Laws Amendment Bill 2017), investors who exchange contracts on a second hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. Investors should note that these changes are not yet law, as the legislation still needs to be passed through the senate for confirmation. BMT Tax Depreciation remain in discussion with government around the new changes and will keep our clients informed on the outcome. To learn more visit www.bmtqs.com.au/budget-2017.
How will depreciation help an investor?
The additional funds an investor receives by claiming depreciation can have a significant impact on their available cash flow. On average, an investor can claim between $5,000 and $10,000 in depreciation deductions in the first full financial year. To learn more, click here.
READ MORE FROM BILLINGS + ELLIS ABOUT TAX DEPRECIATION
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Billings + Ellis have partnered with BMT Tax Depreciation to provide clients with an ATO-compliant determination of claims for tax depreciation. Billings + Ellis can arrange for clients to have a ‘free’ assessment of the available deductions in any investment property as offered by BMT Tax Depreciation.