Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 436

Maximising your property tax depreciation and claims

Property investors are always looking for ways to reduce their tax liability. One way of reducing the taxable income from your investment property is by claiming depreciation deductions on items such as carpets, appliances and fixtures.

There are some important rules imposed by the Australian Tax Office (ATO) that apply when it comes to claiming depreciation.

What is property tax depreciation?

Before delving into the details relating to Division 40 and Division 43 assets, it is important to have a foundational understanding of what property tax depreciation is and how it can benefit you.

As your building ages, it becomes subject to general wear and tear. Each year, the value of the building and its attached assets decrease, and this is known as depreciation. Depreciation applies to two different types of assets:

  • Capital works (Division 43 assets)
  • Plant and equipment (Division 40 assets).

But depreciation isn’t necessarily a bad thing for property investors. The ATO allows investors to claim this loss in value as a tax deduction provided they are generating an income from their investment.

Claiming depreciation on Division 43 assets

Division 43 or capital works refers to the depreciation of the structure of the building. You can also claim capital works deductions on the cost of:

  • structural improvements
  • construction and extensions, and
  • earthworks for environmental protection.

Examples of items where a capital works deduction can be claimed include:

  • fencing
  • driveways
  • garages
  • roofing
  • paint
  • tiling

The structure of residential and commercial buildings generally has an effective life span of 40 years. It's possible to continue claiming capital works deductions for 40 years from the date of construction provided income is generated from the property.

In circumstances where investors do not know the construction costs, a qualified Quantity Surveyor will be responsible for estimating the cost of the building.

Whether a building qualifies for capital allowances is dependent on when it was built and the type of property.

Source: Duo Tax

What are Division 40 assets?

The term Division 40 refers to the plant and equipment assets found within the investment property. These assets are generally easily detachable from the property.

Unlike capital works which depreciate over 40 years, plant and equipment fixtures depreciate at a rate according to the ATO’s Asset Effective Life Schedule, which gives guidance on how many years an asset is effective before it’s worn out. The ATO recognises more than 6,000 different assets that investors can claim tax deductions on.

For example, a carpet, which is subject to wear and tear, has an effective life of eight years. Other examples of Division 40 assets include:

  • air conditioning unit
  • oven and rangehood
  • blinds
  • carpet
  • light shades
  • ventilation fan

Depreciation methods

Investors can use two methods to calculate the depreciation on plant and equipment assets:

  • diminishing value method
  • prime cost method.

Although the end value is the same, investors typically prefer the diminishing value method to allow for a higher depreciation deduction in the first few years.

For example, according to the ATO, a dishwasher has an effective life of 10 years. If an investor depreciates it using the diminishing value method at a rate of 20%, they can claim a deduction of $2,000 in the first year. In the following year, reduce the base value (i.e. $10,000) by your previous claim, so claim 20% on $8,000. And depreciation will continue until it reaches a value of less than $1,000.

When the value is below $1,000, the depreciation rate increases to 37.5% (as per low-value pooling).

A low-value pool is a group of assets that have a value of less than $1,000. Investors can pool low-cost assets (i.e. assets that cost you less than $1,000 to purchase) and low-value assets together and depreciate them at a much faster rate.

The ATO allows investors to write off eligible plant and equipment assets that cost less than $300 as a full deduction in the year the asset was purchased.

Changes to Division 40 claiming laws

After the Federal Budget in 2017, a few new rules were introduced regarding tax depreciation that would impact your claim depending on when you acquired the property:

Before 9 May 2017

After 9 May 2017

A property investor can claim depreciation on plant and equipment that form part of the property they purchased, according to a Quantity Surveyor’s assessment of the asset’s remaining life and value.

Depreciation only applies for costs on new plant and equipment you paid for and installed or plant and equipment that were included as part of the new property.

This means that investors cannot claim deductions on plant and equipment bought by the property’s previous owners.

Closing remarks

To maximise tax deductions on Division 40 and Division 43 assets, investment property owners need a tax depreciation schedule. It is a comprehensive report detailing the claimable deductions on an investment property.

The purpose of a tax depreciation schedule is to outline the value of both the Division 40 and Division 43 assets, as well as how much it has depreciated and will depreciate. This will include a calculation of tax deduction claims.

The tax depreciation schedule document is typically prepared by a professional quantity surveyor, who will inspect your investment property and assign a value to each asset. A single schedule provides 40 years of claimable deductions (or the maximum entitled years). It will help to reduce taxable income and realise a positive cash flow sooner.

 

Tuan Duong is the Principal and Founder of Duo Tax Quantity Surveyors. He is a professional member of the Australian Institute of Quantity Surveyors and a Registered Tax Agent, authorised to offer advice on matters related to depreciation. This article is general advice and does not consider the circumstances of any person.

 

RELATED ARTICLES

EOFY and new depreciation rules for property

Tax deductions are still available for property investors

What tax deductions are available to property investors?

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.