While there are many expenses associated with owning investment properties that can be used as a tax deduction, property depreciation is an eligible deduction that requires you to do nothing but own the property (no outlay of cash required!). However, in order to claim depreciation as a deduction, a tax depreciation schedule is required. Understanding how a tax depreciation schedule works can help investors maximise their deductions and improve their cash flow.
What Is Tax Depreciation?
Tax depreciation is a deduction property investors can claim for the natural wear and tear of a building and its assets over time. The Australian Taxation Office (ATO) allows investors to offset this depreciation against their taxable income, reducing the amount of tax they need to pay.
What Is a Tax Depreciation Schedule?
A tax depreciation schedule is a detailed report prepared by a qualified quantity surveyor, outlining the depreciation deductions available for an investment property. This schedule helps investors legally maximise their tax benefits by documenting both capital works deductions and plant & equipment depreciation.
Types of Depreciation
There are two main types of depreciation that investors can claim:
1. Capital works deduction – This relates to the structural components of a property, such as walls, floors, roofing, and built-in fixtures. Generally, residential properties built after September 15, 1987, are eligible for a capital works deduction, which is typically claimed at 2.5% per year over 40 years.
2. Plant and equipment depreciation – This applies to removable assets within the property, such as carpets, blinds, appliances, and air conditioning units. The depreciation rate for these assets varies depending on their expected lifespan and value.
How a Tax Depreciation Schedule Works
A tax depreciation schedule is developed through the following process:
1. Engage a quantity surveyor – The ATO requires a certified quantity surveyor to prepare the depreciation report.
2. Property inspection – A surveyor assesses the property to identify depreciable assets and structural elements.
3. Prepare the schedule – The surveyor creates a detailed report, outlining the depreciation deductions for both capital works and plant & equipment.
4. Submit to an accountant – The depreciation schedule is then used by the property investor’s accountant to claim deductions on their tax return.
Benefits of a Tax Depreciation Schedule
- – Increases cash flow: By reducing taxable income, investors can retain more of their rental income.
- – Maximises deductions: A professionally prepared schedule ensures all eligible deductions are claimed.
- – One-time cost for long-term gains: A depreciation schedule typically lasts for 40 years and only needs to be prepared once, unless significant renovations are undertaken.
- – ATO compliance: Having a tax depreciation schedule prepared by a qualified surveyor ensures compliance with tax regulations, reducing the risk of errors in tax claims.
Who Should Get a Tax Depreciation Schedule?
Property investors with newly built, renovated, or older properties may benefit from a depreciation schedule. While older properties may have limitations on capital works deductions, plant and equipment depreciation may still apply if new assets have been installed.
A tax depreciation schedule is an essential tool for property investors looking to optimise their tax returns and improve cash flow. By working with a professional quantity surveyor and leveraging available tax benefits, investors may enhance the profitability of their investment properties.
To learn more about tax depreciation schedules or investing in property inside your SMSF, please get in touch with us today.
