Understanding what assets are included in a tax depreciation schedule is crucial for property investors looking to maximise their deductions. A tax depreciation schedule captures both plant and equipment assets, as well as capital works, and is guided by the Income Tax Assessment Act 1997 (ITAA 1997).
Assets Included in a Tax Depreciation Schedule
A tax depreciation schedule encompasses assets that fall under Division 40 and Division 43 of the ITAA 1997. Division 40 includes plant and equipment assets, which are items that can be easily removed or are not integral to the building's structure. Common examples are air conditioning units, carpets, and dishwashers. These assets are typically subject to depreciation based on their effective life as determined by the ATO.
Division 43 covers capital works, which refer to the structural elements of a building, such as walls, floors, and ceilings. These are generally depreciated over a longer period, usually 40 years at a set percentage rate per annum. It's important to note that for properties acquired after 7:30pm AEST on 9 May 2017, investors cannot claim Division 40 deductions for previously used plant and equipment in residential properties.
How This Works in Practice
Consider a 2015-built three-bedroom house in Richmond, Melbourne, purchased for $850,000. The property includes a variety of depreciable assets:
- Plant and equipment, such as a reverse cycle air conditioner (effective life 10–15 years), valued at $3,000.
- Carpets with an effective life of 8 years, valued at $4,000.
- Capital works, including the building structure, valued at $400,000.
Professional Insight
In our experience, investors often overlook the full range of assets that can be depreciated. One thing we frequently see is investors not realising that even small items like smoke alarms and blinds can be depreciated under Division 40. What most investors don't realise is that renovations, even if done by previous owners, can significantly boost capital works deductions. Another common oversight is failing to update the depreciation schedule after making improvements to the property, which can lead to missed deductions.
When Does the Answer Change?
- Properties acquired post-9 May 2017: For residential properties, you cannot claim Division 40 deductions for previously used items if purchased after this date.
- Pre-1987 buildings: These may not qualify for Division 43 deductions unless substantial renovations have been done.
- Commercial vs Residential: Commercial properties are not subject to the same restrictions as residential properties regarding Division 40.
- Properties held in an SMSF: The same depreciation rules apply, but the tax impact differs due to different tax rates.
When Should You Seek Professional Advice?
You should seek professional advice when dealing with unique property types, properties with extensive renovations, or when unsure about the effective life of assets. A Chartered Quantity Surveyor can provide a detailed depreciation schedule that maximises your deductions, while an accountant can ensure these are applied correctly in your tax return.