Negotiating a depreciation clause into your purchase contract can be a strategic move for property investors looking to maximise their tax benefits. By including such a clause, you ensure that the seller provides a detailed schedule of depreciable assets, which can significantly impact your depreciation claims under Division 40 and Division 43 of the ITAA 1997.
The core of this negotiation lies in obtaining a comprehensive list of plant and equipment, as well as capital works, that are eligible for depreciation. Under Division 40, assets like appliances, carpets, and air conditioning units are depreciable, while Division 43 covers structural elements like the building itself. The most common misconception is that all second-hand properties are ineligible for depreciation; however, with the right documentation, you can still claim substantial deductions.
Take a practical example. Imagine you're purchasing a 2010-built 3-bedroom house in Melbourne for $850,000. By negotiating a depreciation clause, you obtain a schedule listing assets like a hot water system (effective life 12 years) and air conditioning (effective life 10–15 years). With a professional depreciation schedule, you might claim $10,000 in first-year depreciation. At a 37% tax rate, this equates to a tax saving of $3,700.
In our experience reviewing thousands of properties across Australia, investors often overlook the importance of a detailed asset list. This oversight can lead to missed depreciation opportunities. Additionally, many investors fail to realise the potential of negotiating these clauses, often assuming it's a fixed part of the contract.
The answer can differ depending on your situation. For properties acquired post-9 May 2017, the rules on claiming depreciation for second-hand assets have tightened. If you're purchasing a property within a Self-Managed Super Fund (SMSF), the depreciation benefits and obligations differ. Commercial properties have different depreciation rules compared to residential properties, and joint ownership can affect how depreciation is claimed.
Engaging a Chartered Quantity Surveyor and your solicitor is crucial. The QS will ensure the depreciation schedule is comprehensive and compliant, while your solicitor will negotiate the contract terms. This collaboration ensures you optimise your tax position while adhering to legal standards.