Yes, you can claim depreciation on a positively geared property. Under Division 40 and Division 43 of the Income Tax Assessment Act 1997, depreciation is a non-cash deduction that allows property investors to offset their taxable income. This means that even if your property generates more income than expenses, resulting in a positive cash flow, you are still entitled to claim depreciation on both plant and equipment (Division 40) and capital works (Division 43).
One common misconception is that depreciation benefits only negatively geared properties. In reality, depreciation is a separate tax deduction independent of the property's cash flow status. By claiming depreciation, you can reduce your taxable income, which may lower your overall tax liability.
To see how this plays out, consider a typical scenario involving a 2010-built, three-bedroom house in Melbourne purchased for $800,000. Suppose the property generates an annual rental income of $40,000 and incurs expenses totaling $30,000, making it positively geared by $10,000. You engage a Chartered Quantity Surveyor to prepare a tax depreciation schedule, identifying $5,000 in annual depreciation deductions. This depreciation reduces your taxable rental income to $5,000. At a 37% marginal tax rate, this reduces your tax bill by $1,850 in the first year.
In our experience reviewing thousands of properties across Australia, many investors overlook depreciation on positively geared properties, mistakenly believing it's not applicable. This oversight can cost thousands in potential tax savings. Another common issue is the failure to update depreciation schedules after renovations, which can significantly alter deductions. Additionally, investors often miss the opportunity to claim depreciation on shared facilities in strata properties, such as lifts or pools.
The answer can differ depending on your situation. For example, properties purchased after 9 May 2017 have restrictions on claiming Division 40 deductions for second-hand plant and equipment. However, capital works deductions under Division 43 remain unaffected. Similarly, if the property is held within a self-managed super fund (SMSF), different tax implications may apply, affecting the net tax outcome. Joint ownership can also influence how depreciation deductions are split, impacting individual tax returns.
Given these nuances, it's crucial to seek professional advice tailored to your specific circumstances. A Chartered Quantity Surveyor can accurately assess depreciation entitlements, while an accountant ensures these deductions are optimally applied to your tax situation. This collaboration maximises your tax savings and ensures compliance with current legislation.