Claiming depreciation on a build-to-rent property can significantly enhance your investment returns by reducing your taxable income. This is particularly pertinent under Division 40 for plant and equipment and Division 43 for capital works of the ITAA 1997, which allow you to deduct the decline in value of certain assets over time.
For build-to-rent properties, the depreciation rules are similar to those for other types of investment properties. You can depreciate newly installed plant and equipment, such as appliances and fixtures, under Division 40, while the structural elements of the building can be claimed under Division 43. The most common misconception is that only residential property investors can claim these deductions, but developers and investors in build-to-rent properties are equally entitled.
To see how this plays out, consider a developer who constructs a build-to-rent complex in Melbourne, valued at $10 million. The property includes high-quality fixtures and fittings valued at $500,000. The developer can claim depreciation on these fixtures under Division 40 over their effective life, and claim capital works deductions under Division 43, which typically spans 40 years. In the first year alone, the developer might claim depreciation totalling $250,000, reducing their taxable income significantly. At a 30% corporate tax rate, this equates to a tax saving of $75,000.
In our experience reviewing thousands of properties across Australia, developers often overlook the importance of obtaining a detailed depreciation schedule. Many assume that depreciation is a one-time calculation, but this is a dynamic process that should be revisited annually to ensure all eligible deductions are claimed. Another frequent oversight is failing to account for the initial cost of plant and equipment accurately, which can lead to under-claiming.
The answer can differ depending on your situation. For instance, if the build-to-rent property was acquired after 9 May 2017, it's crucial to understand that the plant and equipment must be new to qualify for Division 40 claims. Additionally, properties held within an SMSF have specific compliance requirements regarding depreciation.
Given the complexities involved, working with a Chartered Quantity Surveyor is essential in ensuring you maximise your depreciation claims. They can provide a tailored depreciation schedule that aligns with your specific property and financial situation. An accountant can then integrate this into your broader tax strategy to optimise your financial outcomes.