Residential Investment Property Tax Depreciation Explained Investment property tax depreciation is often an overlooked method of obtaining tax deductions. An owner of a residential investment property who receives rent, or the owner or tenant of a commercial or industrial property, may be able to claim a tax deduction for the decline in value of both the Building and the Chattels The eligibility to claim depreciation tax credits is in accordance with the Divisions 40 and 43 of the Income Tax Assessment Act. Every owner of an investment property must declare the rent they receive on their tax return. This is added to their income and the amount of tax paid, is calculated from this sum. The Australian Taxation Office allows you, the property owner, to reduce the amount of tax you pay, by depreciating various components of the improvements on the property and thereby reducing your overall taxable income. You must however have a depreciation schedule for this to happen. Specifically there are two main categories for depreciation being: Capital Works Allowance Plant and Articles (Chattels) The extent of depreciation that may be claimed will vary depending upon the date of construction and the original cost of construction or refurbishment. A Tax Depreciation Schedule is a report that details the depreciation amount for each asset class that can be claimed in each financial year. What Building Allowance can I claim? The Building Allowance, under Division 43 of the Income Tax Assessment Act is a deduction for depreciation of fixed capital items such as main dwelling and garage. The following table shows the rates of depreciation for residential rental properties, which is dependant upon the date construction started. Date Construction started for Building Rate of depreciation per income year Before 18 th July 1985 Nil 18 th July1985-15 th Sep 1987 4% After 15 th Sep 1987 2.5%
The Capital Works allowance also applies to structural improvements such as retaining walls, pools, paving, etc, however the dates and rates differ. Date Construction started for Structural Improvements Rate of deduction per income year Nil Before 27 th Feb 1992 After 27 th Feb 1992 2.5% The Building Allowance is calculated using the straight line depreciation method using the above rates. What Chattel Deduction can I claim? The Plant and Articles Allowance (also known as Chattels) under Division 40 of the Income Tax Assessment Act is a deduction for semi or non-fixed capital items. These items are specified by the Australian Tax Office which mandate an effective life for each item as per Tax Ruling 2000/18C9. Examples of the items include carpets, blinds, heaters, hot water service, appliances, etc and also include furniture and items used in a fully furnished apartment. The following table provides a list of the effective lives for the most common items in a residential property acquired from 1 st July 2004 onwards. Item Effective Life (years) Carpet 10 Blinds 10 Curtains 6 Security System 5 Exhaust Fans 10 Ceiling Fans 5 Range hoods 12 Ovens and Cook tops 12 The basic principle involved is that specific items of plant, as defined in the tax ruling, attract higher depreciation rates that what is applied to the building. The taxation and cash flow benefits from these elements attract the higher depreciation rates often exceeding the benefits available from the building allowance if no separation were undertaken. Chattels depreciation I calculated using either Straight Line or Diminishing Value method of calculation. Under Diminishing value, the investor can achieve a more accelerated form of depreciation and can utilise the Low Value Pooling. Low Value pooling includes items of plant and equipment that are individually valued at less than $1000.These items are depreciated at 18.75% in the 1st year. Unlike other items the calculation is based on 18.75% for the whole year not an apportionment for part of the year. In the 2nd, 3rd and 4th years the rate changes to 37.50%. In the last year the remaining residual balance is written off.
CASE STUDY Double storey Brick veneer townhouse of 160 sqm with double garage. Purchase Price: $482,000 Date of Construction: 1 June 2006 First used as an Investment Property 20 June 2006 The eligible plant items in this property included: Carpets 66m² plus stairway, 3 ceiling mounted extraction fans, 3 smoke detectors, vertical drapes, upright stove, range hood, dishwasher, ducted heating, moterised garage door, gas hot water service and 3 towel rings
Strata Titled apartments and units with common property can enhance your claim. If you own an apartment, unit or townhouse, which has common property, you can also claim for the depreciation of your share of the common property. Common driveways, paths, fences, lobby areas (including multi lift lobbies in multi storey buildings), communal gyms, pools, BBQ facilities, etc, are all included within our schedules. Also included is your share in the fire services, common car park areas, the lifts, lighting, fire escapes, air conditioning, and all mechanical services that are part of the property. This can add significantly to your claim, so it is important that we know what your unit entitlement is (this will appear in the section 32 documentation when you purchase a property).
The Benefits to You The financial benefits can be quite large. An investor not claiming depreciation can be likened to leaving the property vacant. Smart investors can optimise their investment returns by maximising their allowable claims such as depreciation. The cost of the Depreciation Schedule is fully tax deductible and will be paid back by the minimisation of tax very quickly Investors can maximise their taxations benefits Our schedules provide a forecast of depreciation tax credits in each financial year over the life of each asset with annual claims for ten years. There is no need to get a new schedule prepared every 3-5 years. It is important to ensure companies providing taxation schedules perform an actual physical inspection of the property to ensure all items of plant belonging to the property are identified and also the common property items, which owners are entitled to. Our fee is fully tax deductible. For more information If you have any enquiries, would like to find out more, would like an obligation free quote, or would like to arrange a tax depreciation schedule, feel free to contact: Malcolm Reid Depreciation Schedules Coordinator Bolton Connolly - Opteon Ph 02 6921 4395 Fax: 02 6921 3331 Email: admin@bolcon.com.au O:\DATA\Opteon\Depreciation Product\BOLTON CONNOLLY Tax depreciation schedules explained.doc