What is Tax Depreciation?
What is tax depreciation?
Property investors can minimise their taxation payable through tax depreciation allowances available to all residential property investors. Tax depreciation is essentially an allowance for the decline in value of the assets within an investment property over time.
What is a tax depreciation schedule?
A tax depreciation schedule is simply a report detailing the depreciation entitlements available to you within your investment property. The depreciation entitlements can be broken into two simple categories;
1. Capital allowances (Division 43)
Capital allowances are based on the historical construction cost of the property, excluding the value of plant and equipment assets. Allowances can be claimed on the original construction value, where it was constructed after the 16 of September 1987, or on any subsequent qualifying renovations or improvements completed by either the previous rental provider or yourself.
2. Plant and equipment items (Division 40)
Plant and equipment items are generally 'loose assets' or control panels for automated systems as defined by the Australian Taxation Office (ATO). The ATO publishes a list of these assets every year around July. In a residential property, the most common plant assets are;
• Bathroom accessories
• Exhaust fans
• Hot water systems
• Carpets
• Vinyl
• Blinds
• Curtains
• Air conditioners
• Door closers
• Security systems
• And many more...
These assets are estimated as part of a depreciation schedule, and you'll generally be able to claim between 100 per cent and 20 per cent of the estimated residual value each year. However, it's important to note that due to legislation changes announced on the 9th of May 2017, investors are only eligible to claim plant and equipment deductions when they purchase a new property, or they install the brand-new assets themselves (as part of an improvement/renovation).
The depreciation schedule itself will show 40 years' worth of depreciation in two different accepted methods.
How does a depreciation schedule change your tax return?
The depreciation deductions found with a depreciation schedule are deducted from your taxable income. For example, if a property investor earns $100,000 per year and we find $11,000 worth of deductions in a particular year, they will only pay tax on an income of $89,000. An example of the difference in taxation payable is shown below;
Tax payable on $100,000 = $24,632.00*
Tax payable on $89,000 = $20,562.00*
Difference/tax saving = $4,070*
(Source: ATO Simple Tax Calculator)
As a valued Fletchers client, through our depreciation partner MCG Quantity Surveyors, you're entitled to a saving of $110 on your residential depreciation schedule.
For more information and a free assessment of your potential depreciation claims, please contact MCG Quantity Surveyors here.
*Please note that marginal taxation rates are subject to change and these figures are provided as a guide only.