Older properties can still offer significant tax depreciation benefits, but the rules are more nuanced than for new properties. Understanding these distinctions can help you maximise your returns and avoid common pitfalls.
Depreciation Rules for Older Properties
Depreciation on older properties primarily involves two ATO Divisions: Division 40 (plant and equipment) and Division 43 (capital works). Division 43 allows deductions for buildings constructed after 16 September 1987, typically at a rate of 2.5% per annum. If your property was built before this date, you won't be able to claim capital works deductions. However, plant and equipment depreciation under Division 40 is more restrictive for older properties acquired after 9 May 2017. The 2017 budget changes mean you can't claim depreciation on second-hand plant and equipment in residential properties unless you were the original owner or the property is used for business purposes.
How This Works in Practice
Consider a 1980s-built 3-bedroom house in Melbourne, purchased for $800,000. While you can't claim Division 43 capital works, you can still claim on any eligible new plant and equipment installed after purchase. Suppose you install new air conditioning and kitchen appliances costing $20,000. These assets can be depreciated under Division 40 over their effective lives, saving you approximately $7,400 in tax in the first year at a marginal tax rate of 37%.
Professional Insight
In our experience, investors often overlook the potential to claim depreciation on renovations or new additions to older properties. One thing we frequently see is investors assuming older properties have no depreciation value, which isn't true if updates have been made. What most investors don't realise is that a detailed depreciation schedule prepared by a Chartered Quantity Surveyor can reveal significant deductions that might otherwise be missed. Additionally, maintaining comprehensive records of any renovations or improvements is crucial to substantiate claims.
When Does the Answer Change?
- Post-9 May 2017 Acquisitions: For properties purchased after this date, second-hand plant and equipment can't be depreciated in residential settings unless for business use.
- Pre-1987 Buildings: No Division 43 deductions are available for buildings constructed before 16 September 1987.
- Commercial Properties: Different rules apply, allowing for more extensive depreciation claims.
- Joint Ownership: Depreciation claims are split according to ownership percentages.
- Renovations and Improvements: New works may give rise to fresh depreciation opportunities under both Divisions 40 and 43.
When Should You Seek Professional Advice?
Depreciation claims can be complex, especially for older properties. It's essential to consult with a Chartered Quantity Surveyor to create an accurate depreciation schedule and an accountant to ensure compliance with tax obligations. Specific details of your property, such as the construction date, improvements, and ownership structure, can significantly affect your ability to claim.