Depreciation is a powerful tool for property investors in Australia looking to reduce their taxable income. By claiming depreciation, you can account for the wear and tear on your investment property's assets and structure, effectively lowering your taxable income and reducing your tax bill.
Under Division 40 of ITAA 1997, investors can claim depreciation on plant and equipment, which includes items like carpet, hot water systems, and air conditioning units. Division 43 allows you to claim for capital works, covering the building's structure and fixed items like walls, doors, and plumbing. These deductions recognise that assets lose value over time and offer a way to offset this loss against your taxable income.
One common misconception is that all depreciation can be claimed regardless of the property's purchase date. However, significant changes were introduced in the 2017 federal budget. For properties acquired after 7:30 pm AEST on 9 May 2017, investors can no longer claim Division 40 depreciation on second-hand residential property plant and equipment. This rule does not apply to Division 43, which remains claimable.
Take a practical example of how this plays out. Consider a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased for $750,000. The property includes plant and equipment valued at $50,000 and capital works valued at $200,000. Under Division 40, you can depreciate the plant and equipment over their effective lives. If the effective life of the air conditioning system is 10 years, you can claim $5,000 per year for it. Under Division 43, you can claim 2.5% of the capital works annually, amounting to $5,000. Together, these deductions reduce your taxable income by $10,000 annually. At a 37% marginal tax rate, this saves you $3,700 in tax each year.
In our experience reviewing thousands of properties across Australia, investors often miss claiming all eligible depreciation deductions, particularly for capital works, which can be claimed even on older properties. Many also fail to update their depreciation schedules after renovations, missing out on additional deductions. Another frequent oversight is not seeking a professional depreciation schedule, leading to inaccurate or missed claims.
The answer can differ depending on your situation. For instance, if you own a property in joint names, the depreciation benefits are split according to ownership percentage. If your property is part of a Self-Managed Super Fund (SMSF), different rules and tax rates apply. For properties built before 1987, Division 43 claims may not be applicable unless renovations were undertaken post-1987. The post-2017 budget rules mean second-hand property owners face different limitations compared to new property owners.
Given the complexity and the potential for significant tax savings, it's wise to consult both a Chartered Quantity Surveyor and an accountant. A QS can provide an accurate depreciation schedule, while an accountant can ensure that these deductions are correctly applied in your tax return, tailored to your personal circumstances.