Purchasing an off-the-plan apartment can be a strategic investment, particularly when it comes to tax depreciation benefits. As an investor, you can claim depreciation on both the building structure (Division 43) and the plant and equipment (Division 40), provided certain conditions are met.
How Depreciation Works for Off-the-Plan Apartments
When you purchase an off-the-plan apartment, you are essentially buying a property that is either newly built or substantially renovated. This qualifies you for depreciation deductions under Division 40 and Division 43 of the Income Tax Assessment Act 1997. Division 43 allows you to claim the cost of construction over a period of 40 years at a rate of 2.5% per annum. Division 40 covers plant and equipment, which are depreciated over their effective lives as determined by the ATO.
A common misconception is that purchasing off-the-plan automatically allows for all forms of depreciation. However, under the 2017 budget changes, if the property is second-hand, you cannot claim depreciation on plant and equipment unless they are brand new. This means that for off-the-plan purchases, it's crucial that the apartment is new or substantially renovated to claim the maximum depreciation benefits.
How This Works in Practice
Consider a scenario where you purchase a two-bedroom off-the-plan apartment in Melbourne for $800,000. The construction was completed in 2023. The building cost is estimated at $400,000 of this price, and plant and equipment at $50,000.
Under Division 43, you can claim 2.5% of the construction cost annually, equating to $10,000 per year. For Division 40, assuming an average effective life of 10 years for the plant and equipment, you could claim $5,000 annually.
If you are on a 37% marginal tax rate, your annual tax savings could be around $5,550. Over the first full year, these deductions significantly enhance your cash flow, reducing your tax payable and improving the investment's profitability.
Professional Insight
In our experience, off-the-plan apartments offer substantial depreciation benefits, especially when brand new. One thing we frequently see is investors underestimating the impact of these deductions on their cash flow. What most investors don't realise is the importance of obtaining a professional depreciation schedule from a Chartered Quantity Surveyor. This document accurately details all depreciable assets, ensuring you claim the maximum allowable deductions.
Another insight is the impact of the purchase date relative to the completion date. Delays in construction can affect when you start claiming depreciation, often catching investors by surprise. Additionally, many overlook the benefit of claiming depreciation immediately in the financial year the property becomes available for rent, even if it’s only for part of the year.
When Does the Answer Change?
When Should You Seek Professional Advice?
Depreciation calculations can be complex, especially with variables like purchase timing, asset effective lives, and legislative changes. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, while an accountant can integrate this into your tax return effectively. It's crucial to seek advice if your situation involves unique aspects like joint ownership or use within a self-managed super fund (SMSF).