General Depreciation Rules
As a general rule, depreciation is available to any property owner who
obtains assessable income by way of rent from an investment property.
A depreciation deduction acts by reducing your taxable income and,
therefore, generating a greater return on your property investment.
A complete taxation depreciation report from Write It Off will address
deductions available to you for the construction of your property,
including any structural additions, and those deductions available to
you via plant and equipment at the property.
Who can use a depreciation report
Anyone wishing to lodge a tax return with rent from an investment
property as part of their income could greatly benefit from having a
comprehensive deprecation report done. It provides you with a
legitimate tax deduction that has the effect of reducing your taxable
income and thus reducing the amount of tax payable.
How does it improve your tax situation / cashflow?
Below we provide a brief calculated example of using depreciation as a
tax deduction and how it improves your tax situation. Note: example is
based on an individual tax payer and is illustrative only. In every
situation professional tax advice should be obtained from your
accountant or tax adviser.
||Did claim deprec
||Did not claim deprec
|Repair & Maint
|Body Corp Fees
Therefore in this example, if depreciation was not claimed, this tax
payer would be worse off by $1,650.00 (would have to pay the tax
office). Important to note that this example is for one year only and
does not take into account of the rewards for future years.
*Does not include medicare levy
ATO rules for Capital Costs
Capital costs or construction cost is the cost to build, extend or
renovate a building. It does not include the cost of the land, the
initial costs to clear the land or soft landscaping such as trees or
woodchip. Also no value is allowed to be attributable to your own
personal labour if for example you painted the building yourself.
Rates of depreciation are determined by the type of construction and
the year in which it was built. Generally speaking any residential
investment property built after 18th July 1985 can be depreciated at
2.5% (or 4.0% in some cases if construction falls in certain dates).
Capital works deductions are certain types of construction expenditure
on your residential investment property. Deductions can apply to
capital works such as:
- A building or an extension;
- Alterations – kitchen or bathroom; other structural improvements – paving, pergola, driveway, retaining wall or fence.
ATO rules for Plant & Equipment
Plant and equipment is a term encompassing items such as curtains,
kitchen stove/oven, carpet and vinyl floor coverings and, where
applicable, loose furniture such as beds, tables or chairs.
The depreciation of items of plant and equipment is calculated using
the effective life of the asset. Generally speaking, the effective life
of any depreciating asset is the length of time (in years) the asset
can be used to produce taxable income.
What’s the difference between capital costs, fixtures & fittings and repairs?
As explained above, capital costs (also known as construction costs) is
the building itself and fixtures that form part of the building.
Fixtures and fittings (also known as plant, equipment or articles) are
generally removable items sitting in the building that if removed would
not drastically change the make up of the building or render the
Repairs and maintenance has always been a contentious issue and tax
payers need to be very careful when considering whether expenditure is
a repair or an improvement to the property and therefore more than
likely be depreciable over time. One easy point to remember when trying
to determine this is whether or not you have repaired an item to bring
it back to its original condition (or working order) or have you
improved the item beyond its original condition. Eg: replacing a rotted
piece of timber on your pergola is a repair but knocking down the
pergola and replacing the entire structure is an improvement and as
such considered a capital expense and must be depreciated over time.
Common Property is defined in ATO ID 2003/229 as ‘that part of a strata
plan not comprised in any owner’s lot and includes both fixed and
moveable property and facilities intended for common use. The common
property may include depreciating assets and buildings and other
forming part of ‘common property’ are depreciable. A depreciation
schedule from Write It Off will include any depreciable amount
attributable to common property.