When assisting clients with depreciation claims, having the correct documents is crucial to ensure they maximise their deductions and comply with ATO regulations.
Essential Documents for Depreciation Claims
To prepare a comprehensive depreciation claim, the following documents are essential:
Depreciation Schedule: Prepared by a qualified Quantity Surveyor, this schedule outlines the deductions available under Division 40 (plant and equipment) and Division 43 (capital works) of the ITAA 1997. It is critical that this schedule is tailored to the specific property and includes all depreciating assets.Purchase Contract and Settlement Statement: These documents confirm the purchase price and settlement date, which are necessary for establishing the property's cost base and eligibility for deductions.Building Plans and Specifications: If available, these provide detailed information about the property's structure and any inclusions that may qualify for capital works deductions under Division 43.Records of Renovations or Improvements: Any renovations or improvements made after purchase must be documented with invoices and receipts. These costs can be added to the cost base and may qualify for additional depreciation deductions.Lease Agreements: If the property is rented, lease agreements are needed to prove the property is income-producing, which is a requirement for claiming depreciation.How This Works in Practice
Consider a client who owns a 2015-built 3-bedroom townhouse in Melbourne, purchased for $850,000. They engage a Quantity Surveyor to prepare a depreciation schedule. The schedule identifies $20,000 in eligible plant and equipment under Division 40 and $50,000 in capital works under Division 43. In the first year, they claim $4,000 in deductions for plant and equipment and $1,250 for capital works. At a 37% marginal tax rate, this results in a tax saving of $1,943 in the first year alone.
Professional Insight
In our experience, the most overlooked document is the detailed renovation records. Many clients underestimate the importance of thorough documentation for every improvement made. One thing we frequently see is clients not realising that even small upgrades like new carpets or fixtures can significantly impact their depreciation claim. What most investors don't realise is that missing out on these deductions can add up to thousands of dollars over the property's life. It's also common for clients to assume that a depreciation schedule is a one-time task; however, it should be updated whenever significant changes are made to the property.
When Does the Answer Change?
Post-9 May 2017 Acquisitions: For properties acquired after this date, second-hand plant and equipment are not eligible for depreciation under Division 40 unless the property is new or substantially renovated.Pre-1987 Buildings: These properties may not qualify for Division 43 deductions unless renovations have been done after this date.Properties Held in an SMSF: The documentation requirements remain the same, but the tax implications differ due to the unique structure of superannuation funds.Commercial Properties: Different rules and effective lives apply, particularly under Division 40, which may affect the documentation needed.When Should You Seek Professional Advice?
Clients should seek professional advice when they are unsure about the eligibility of certain assets or improvements for depreciation. A Chartered Quantity Surveyor can provide a tailored depreciation schedule that maximises deductions, while an accountant can ensure that these deductions are correctly applied to the client's tax return. Complex scenarios, like mixed-use properties or those held in trusts, particularly benefit from expert advice.
What to Do Next
Gather all purchase and renovation documentation for the property.
Engage a qualified Quantity Surveyor to prepare or update a depreciation schedule.
Ensure all lease agreements are current and accessible.
Review the schedule annually to incorporate any new improvements.
Consult with an accountant to apply deductions correctly in the tax return.
Keep a digital backup of all documents for easy access during audits.
Frequently Asked Questions
Can I claim depreciation without a Quantity Surveyor's report?
While not mandatory, a Quantity Surveyor's report ensures accurate and maximised deductions, as they are recognised by the ATO as qualified to estimate construction costs.
What happens if I miss a year of claiming depreciation?
You can amend past tax returns to include missed depreciation. However, it's best to claim each year to optimise cash flow.
Are there state-specific requirements for depreciation claims?
While the general requirements are consistent across Australia, local council regulations may affect building classifications and renovations, impacting claims.
How does depreciation affect my capital gains tax?
Depreciation claimed reduces your property's cost base, potentially increasing capital gains tax upon sale.
Where do I enter depreciation in my tax return?
Depreciation is entered under 'Deductions' in the rental property section of your tax return.
Written by Koste Team · Koste Chartered Quantity Surveyors · AIQS Member · RICS Member · TPB Registered · 1300 669 400 · info@koste.ai