Understanding which properties qualify for tax depreciation is crucial for any Australian property investor seeking to maximise their returns. Depreciation allows you to claim a tax deduction for the wear and tear of a building and its fixtures over time, potentially saving you thousands of dollars annually.
Properties Eligible for Tax Depreciation
In Australia, both residential and commercial properties can qualify for tax depreciation, provided they generate income. For residential properties, this typically means rental properties. Depreciation is claimed under two key divisions of the Income Tax Assessment Act 1997: Division 40, which covers plant and equipment, and Division 43, which covers capital works.
For residential properties, the 2017 budget changes significantly impacted what can be claimed under Division 40. If you acquired a second-hand property after 7:30pm AEST on 9 May 2017, you cannot claim depreciation on previously used plant and equipment. However, you can still claim Division 43 deductions for the building's structure and any new plant and equipment you purchase for the property.
For commercial properties, the rules are more flexible, as the 2017 changes primarily targeted residential real estate. Investors can typically claim both Division 40 and Division 43 deductions on commercial properties, regardless of the property's purchase date.
How This Works in Practice
Consider a 2010-built 3-bedroom house in Richmond, Victoria, purchased for $900,000. If the property is rented out, you can claim Division 43 deductions on the building's structure at 2.5% per annum, assuming construction costs were $300,000. This equates to a $7,500 annual deduction. If you install new plant and equipment, such as a $5,000 air conditioning system, you can claim Division 40 deductions on these assets over their effective life. At a 37% marginal tax rate, these deductions could save you approximately $4,625 in tax in the first year.
Professional Insight
In our experience, many investors overlook the importance of getting a professional depreciation schedule prepared. This document outlines all potential claims and ensures you don't miss out on deductions. One thing we frequently see is investors not realising they can claim depreciation on renovations done by previous owners, provided there are records of the construction costs. Additionally, investors often assume older properties aren't eligible for significant deductions, but even properties built before 1987 can have substantial Division 40 claims if new plant and equipment are added.
When Does the Answer Change?
When Should You Seek Professional Advice?
Tax depreciation can be complex, especially with changing legislation. It's crucial to consult both a Chartered Quantity Surveyor and your accountant to ensure you're claiming the correct deductions. A QS can provide a detailed depreciation schedule, while an accountant can advise on how these deductions impact your overall tax situation.
What to Do Next
By following these steps, you can ensure you're maximising your tax depreciation claims and enhancing your property's investment return.