In the realm of taxation, understanding what assets are excluded from plant and equipment depreciation can significantly affect your tax planning and financial outcomes. Under Division 40 of ITAA 1997, plant and equipment assets are those items that can be easily removed from a property, such as air conditioning units, carpets, and appliances. However, not all assets qualify for depreciation under this division.
The primary exclusions from plant and equipment depreciation include:
- Land: Land itself is not a depreciating asset and is excluded from depreciation claims.
- Trading Stock: Items held as trading stock are not depreciable assets as they are intended for sale.
- Capital Works: The structural elements of a building fall under Division 43, which covers capital works deductions, not plant and equipment.
- Second-hand Residential Assets: As per the 2017 budget changes, investors who acquired second-hand residential properties after 7:30pm AEST on 9 May 2017 cannot claim depreciation on previously used plant and equipment.
To see how this plays out, consider a 2010-built 3-bedroom house in Toorak, Melbourne, purchased for $950,000 in 2022. The investor cannot claim depreciation on the existing dishwasher or air conditioning units, as they are considered second-hand. However, if the investor installs a new oven costing $1,200, they can claim depreciation on this new asset under Division 40. Assuming an effective life of 12 years and a diminishing value method, the first-year depreciation would be approximately $200, reducing the investor's taxable income by this amount.
In our experience reviewing thousands of properties across Australia, we often see investors overlook the impact of the 2017 budget changes. Many mistakenly assume they can depreciate all plant and equipment in a property, not realising the restrictions on second-hand assets. Additionally, confusion between Division 40 and Division 43 can lead to incorrect claims, potentially triggering ATO audits.
The answer can differ depending on your situation. For instance, if you own a commercial property, the rules differ as these properties are not subject to the same restrictions on second-hand plant and equipment. Additionally, properties purchased before 9 May 2017 are grandfathered under the old rules, allowing depreciation claims for existing plant and equipment.
When dealing with these complexities, consulting with a Chartered Quantity Surveyor and an accountant is crucial. They can ensure your claims are accurate and compliant, potentially saving you from costly errors.