A depreciation schedule is a powerful tool that can significantly affect a client's tax return by reducing their taxable income through allowable deductions. Under Division 40 and Division 43 of the Income Tax Assessment Act 1997, property investors can claim depreciation on both plant and equipment and capital works, respectively. This means that the wear and tear on the property's structure and its fixtures can be written off over time, reducing the investor's taxable income and, subsequently, their tax liability.
The main misconception is that depreciation is only relevant for new properties. In reality, both new and existing properties can benefit from a depreciation schedule, although the rules differ based on the property's purchase date and type. For example, the changes introduced in the 2017 federal budget stipulate that investors who purchased second-hand residential properties after 7:30 pm AEST on 9 May 2017 cannot claim depreciation on previously used plant and equipment. However, they can still claim capital works deductions if applicable.
To see how this plays out in practice, consider a 2015-built 3-bedroom house in Melbourne purchased for $850,000. The property includes a mix of new and existing plant and equipment. A comprehensive depreciation schedule reveals that the investor can claim $10,000 in capital works deductions and $5,000 in plant and equipment depreciation in the first year. At a 37% marginal tax rate, this results in a tax saving of $5,550 for the client in that year alone.
In our experience reviewing thousands of properties across Australia, many investors overlook the potential of depreciation schedules, especially when dealing with older properties. Another frequent issue is underestimating the value of plant and equipment, which can lead to missed deductions. Additionally, investors often fail to update their schedules after renovations, resulting in inaccurate claims.
The answer can differ depending on your situation. For instance, properties purchased before 9 May 2017 are not affected by the changes to Division 40 deductions. Similarly, commercial properties and those owned by companies or SMSFs have different depreciation rules. Partial year ownership also requires prorated calculations, which can alter the available deductions.
Given these complexities, it's crucial to seek professional advice. A Chartered Quantity Surveyor can ensure that the depreciation schedule is accurate and compliant with current legislation. Meanwhile, an accountant can apply these deductions correctly to the client's tax return, ensuring optimal tax outcomes.