Owning an investment property with your spouse offers a range of financial advantages, including the ability to claim depreciation. Depreciation allows property investors to reduce their taxable income by accounting for the wear and tear of their investment property over time. However, when a property is owned jointly, it's crucial to understand how to correctly apportion these deductions between owners.
Under the Income Tax Assessment Act 1997, specifically Division 40 for plant and equipment and Division 43 for capital works, each owner must claim depreciation in proportion to their ownership interest. This means if you and your spouse own the property equally, each of you can claim 50% of the total depreciation deduction. It's essential to keep in mind that these deductions can significantly impact your tax return, so ensuring they are accurately calculated and reported is vital.
One common misconception is that the total depreciation can be claimed by one owner alone, which is incorrect. The ATO requires that depreciation is split according to ownership percentage, ensuring that both parties benefit from this tax advantage.
To see how this plays out, consider a practical example: Suppose you and your spouse own a 2-bedroom apartment in Melbourne, purchased for $800,000 in 2020. The building structure qualifies for Division 43 deductions, and the plant and equipment fall under Division 40. If the total annual depreciation amounts to $10,000, each of you can claim $5,000 as a deduction. At a marginal tax rate of 37%, this results in a tax saving of $1,850 per person annually.
In our experience reviewing thousands of properties across Australia, several patterns emerge. Firstly, investors often overlook the depreciation potential of older properties, assuming they offer little to no benefit. Secondly, many fail to update their depreciation schedule after renovations, missing out on increased deductions. Thirdly, some investors mistakenly believe that only new properties are eligible for depreciation, which is not the case. Lastly, miscalculating ownership percentages can lead to incorrect claims and potential ATO audits.
The answer can differ depending on your situation. If your property was acquired after 7:30pm AEST on 9 May 2017 and is second-hand, you cannot claim Division 40 depreciation on previously used plant and equipment. However, Division 43 deductions remain unaffected. For properties held in a Self-Managed Super Fund (SMSF), different rules may apply, and it’s crucial to ensure compliance with both superannuation and tax laws. Additionally, if the property is sold within 12 months, the CGT discount is not applicable, impacting your overall tax strategy.
When it comes to tax depreciation, individual circumstances play a significant role in determining the best approach. Consulting with a Chartered Quantity Surveyor and an accountant ensures that you not only maximise your deductions but also remain compliant with ATO regulations. These professionals can provide tailored advice based on the specifics of your property and financial situation.
Here are some practical steps you can take immediately: