Tax depreciation is a crucial tool for property investors in Australia, allowing you to claim deductions for the decline in value of your investment property's assets. By understanding and utilising tax depreciation, you can significantly enhance your investment returns by reducing your taxable income.
How Tax Depreciation Works
Tax depreciation involves two main components under the Income Tax Assessment Act 1997: Division 40 and Division 43. Division 40 covers plant and equipment, which includes removable assets like air conditioners, carpets, and appliances. Division 43 pertains to capital works, which involves the building structure and fixed items such as walls, doors, and plumbing.
The most common misconception is that all property expenses are immediately deductible. However, depreciation spreads the deduction over the effective life of an asset. For example, a hot water system might have an effective life of 12 years. Post-2017 budget changes, investors purchasing second-hand residential properties can only claim Division 40 on new assets, while Division 43 remains claimable regardless of the property's purchase date.
How This Works in Practice
Consider a 2015-built 3-bedroom house in South Melbourne, purchased for $850,000. The property includes $40,000 worth of plant and equipment and $200,000 in capital works. Using a depreciation schedule, you might claim $5,000 in Division 40 deductions and $5,500 in Division 43 deductions in the first year. Assuming a 37% marginal tax rate, this results in a tax saving of $3,850 in the first year.
Professional Insight
In our experience, investors often overlook the potential of tax depreciation. One thing we frequently see is investors failing to update their depreciation schedule after renovations, missing out on substantial deductions. Another common issue is not claiming depreciation on properties that have been held for several years, assuming it's too late. In reality, you can amend previous tax returns to include missed deductions. Additionally, investors often mistakenly believe that depreciation isn't applicable to older properties, but Division 43 can still be claimed on renovations completed after 1987.
When Does the Answer Change?
When Should You Seek Professional Advice?
Depreciation can be complex, with rules varying based on property type, acquisition date, and ownership structure. Engaging a Chartered Quantity Surveyor is essential for an accurate depreciation schedule, while an accountant ensures correct application in your tax return. This collaboration maximises your deductions and compliance with ATO regulations.