Plant and equipment depreciation is a crucial aspect of property investment in Australia, allowing investors to claim deductions on the decline in value of specific assets within a property. These assets, often referred to as 'plant and equipment', include items like air conditioning units, carpets, and kitchen appliances. Understanding how this works can significantly impact your investment's profitability.
How Plant and Equipment Depreciation Works
Under Division 40 of the Income Tax Assessment Act 1997, plant and equipment assets within a property can be depreciated over their effective life. This means investors can claim a tax deduction each year for the wear and tear on these assets. The effective life of an asset is determined by the ATO and varies depending on the type of asset. For example, carpet typically has an effective life of around 8 years, while an air conditioning unit might range from 10 to 15 years.
One of the biggest misconceptions is that all property investors can claim these deductions. However, significant changes were introduced in the 2017 Federal Budget. As of 9 May 2017, investors who purchase second-hand residential properties can no longer claim depreciation on previously used plant and equipment. This rule aims to prevent double-dipping, where both the previous and current owners claim depreciation on the same asset.
How This Works in Practice
Consider a scenario where you purchase a new 2-bedroom apartment in Sydney for $800,000. The apartment comes with brand new plant and equipment valued at $50,000, including appliances and fittings. Assuming an average effective life of 10 years for these assets, you can claim $5,000 annually in depreciation.
If you're in the 37% tax bracket, this deduction translates to a tax saving of $1,850 each year. Over a decade, this amounts to a total tax saving of $18,500, significantly enhancing your overall return on investment.
Professional Insight
In our experience, many investors overlook the impact of plant and equipment depreciation on their cash flow. One thing we frequently see is investors underestimating the value of their assets, leading to smaller deductions than they're entitled to. What most investors don't realise is that engaging a Chartered Quantity Surveyor to prepare a tax depreciation schedule can uncover thousands of dollars in potential deductions.
Another common scenario involves investors assuming they can't claim any depreciation on older properties. However, if you've added new assets or renovated, these can be depreciated. It's about knowing what qualifies and ensuring nothing is missed in your claim.
When Does the Answer Change?
When Should You Seek Professional Advice?
Depreciation calculations can be complex, especially with the nuances of effective lives and legislative changes. It's advisable to consult with a Chartered Quantity Surveyor for an accurate depreciation schedule. Additionally, your accountant can integrate these deductions into your overall tax strategy. Every property is unique, so personalised advice ensures you maximise your benefits.