Depreciation is a non-cash deduction that allows you to account for the decline in value of your investment property’s structure and assets over time. By leveraging a depreciation schedule, you can significantly enhance your weekly cash flow by reducing your taxable income, which in turn lowers your tax payable.
How Depreciation Schedules Enhance Cash Flow
Under Division 40 and 43 of the ITAA 1997, investors can claim deductions for both plant and equipment (Division 40) and capital works (Division 43). Plant and equipment cover items like carpets and appliances, while capital works refer to the structural element of the building. Many investors mistakenly believe depreciation only applies to new properties, but older properties can also qualify under certain conditions.
The most common misconception is that depreciation is only beneficial at tax time. In reality, by reducing your taxable income, you effectively increase your weekly cash flow throughout the year. This is because the tax savings from depreciation can be applied to reduce your PAYG withholding, meaning you take home more from each pay packet.
How This Works in Practice
Consider a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased for $700,000. A depreciation schedule reveals $5,000 in Division 40 deductions and $7,000 in Division 43 deductions for the first year. If your marginal tax rate is 37%, these deductions reduce your taxable income by $12,000, saving you $4,440 in tax for the year. Spread over 52 weeks, this equates to an additional $85 per week in your pocket.
Professional Insight
In our experience, many investors underestimate the value of a depreciation schedule. One thing we frequently see is investors assuming older properties don't qualify for depreciation, missing substantial tax savings. Another common oversight is failing to update the schedule after renovations, which can add significant depreciable value. What most investors don't realise is that even small items like blinds or smoke alarms can add up to meaningful deductions. Engaging a qualified Quantity Surveyor to prepare your depreciation schedule ensures all potential deductions are captured.
When Does the Answer Change?
The answer changes if you purchased a second-hand residential property after 7:30pm AEST on 9 May 2017, as you cannot claim Division 40 on previously used assets. However, Division 43 deductions remain unaffected. For properties built before 1987, Division 43 deductions are generally unavailable unless substantial renovations have occurred. Commercial properties operate under different rules, allowing for more extensive Division 40 claims. If the property is held in an SMSF, the approach to depreciation can differ due to tax rates and compliance requirements.
When Should You Seek Professional Advice?
Every property is unique, and the potential deductions can vary widely. Consulting with a Chartered Quantity Surveyor ensures your depreciation schedule is accurate and maximises your deductions. An accountant can also assist in integrating these deductions into your tax return effectively. Complex situations, such as joint ownership or properties held in trusts or SMSFs, particularly benefit from professional advice.