Tax depreciation is...
As a building gets older and items within it wear out, they depreciate in value. The Australian Tax Office (ATO) governs legislation that allows owners of income producing property to claim a tax deduction for this wear and tear. Capital works deductions can be claimed on the building's structure and items considered permanently fixed to the property, while depreciation can be claimed on the plant and equipment assets contained within it.
Depreciation for income producing properties defined by the ATO is claimable under two major components: Capital works deductions (division 43) and Plant and equipment depreciation (division 40).
Tax depreciation helps investment property owners claim more
Claiming depreciation and the associated capital works deductions is a significant taxation benefit, and one which many investment property owners are unaware of. Depreciation is a non-cash deduction meaning you do not need to spend any money to claim it.
See below for typical depreciation deductions found for different property types.
What is deductible under capital works allowance?
Capital works deductions or building write-off refers to the tax deduction for the building's structure and items considered to be permanently fixed to the property. The ATO recognises that your property will deteriorate and likely need repairs and maintenance work done, in order for you to continue to produce a taxable income. In a residential property, capital works deductions are available to be claimed at 2.5% for the ATO specified life of the property which is 40 years. For commercial and other types of non-residential properties, capital works deductions can be claimed either at 2.5% or 4% of the property's historical construction cost depending on the age and type.
Here are a few examples of the depreciable items you may be able to claim under a capital works allowance for both residential and commercial properties:
- Built-in kitchen cupboards
- Clothes lines
- Doors and door furniture (handles, locks etc.)
- Fences and retaining walls
- Sinks, basins, baths and toilet bowls.
- Car parks
- Sinks, basins and toilet bowls.
What is plant and equipment?
Plant and equipment assets are items which are considered by the ATO to be easily removable from the property. The depreciation rates and effective lives of all ATO specified plant and equipment assets differ by asset and even by industry. The ATO recognises that plant and equipment items will wear out more quickly than the building itself and likely need replacing sooner.
Examples of items that can be depreciated as plant and equipment include:
- Hot water systems, heaters, solar panels
- Air-conditioning units
- Blinds and curtains
- Light shades
- Swimming pool filtration and cleaning systems
- Security systems.
- Carpet and flooring
- Manufacturing equipment
- Commercial ovens.
Research by BMT Tax Depreciation shows that between 15 - 35% of the construction cost of a residential building is made up of plant and equipment assets. Maximising plant and equipment deductions is one of the keys to ensuring increased depreciation claims for a property owner.
How do property investors claim depreciation?
In order to claim depreciation and capital works deductions property investors generally need to enlist a specialist Quantity Surveyor to complete a comprehensive capital allowances and tax depreciation report or schedule. When completed, a tax depreciation schedule outlines the deductions available for both capital works and plant and equipment items on an income producing property and is used each financial year when preparing tax returns.
A BMT Capital Allowance and Tax Depreciation Schedule includes a detailed outline of two major components:
Plant and equipment assets (division 40): Includes assets which can be easily removed from the property. The asset’s condition, quality and effective life all determine the allowances available.
Capital works deduction (division 43): Is the deduction for the building’s structure. Available on properties constructed post 1982 (non residential) and 1987 (residential).
Capital works deduction (division 43)
Plant & equipment assets (division 40)