Property Investor Tips

Investments may yield extra through tax depreciation

Posted on Monday, May 25 2009 at 1:48 PM

Are you a property investor missing out on the full financial benefits available under taxation legislation for depreciation allowances for investment properties?

Herron Todd White estimates about 70 per cent of property owners are unaware of the benefits available to them by simply having a tax depreciation schedule prepared for their investment property.

Basically, a depreciation schedule is a report that outlines the depreciation allowances property investors are entitled to under the law.

Recent research has revealed 1.3 million Australians now own a total of 1.5 million rental properties across the country. This figure has risen significantly over the past five years as many investors have sought to capitalise on the boom in property prices.

There are a number of ways you can reclaim some of your tax dollars by knowing what's available to you.

Tax depreciation can be claimed once a property becomes income producing; for example from deriving an income through tenancy or business-related income.

ATO allowable deductions

The Australian Tax Office allows deductions for depreciation on the main building itself, any structural improvements and fixtures and fittings such as kitchen appliances, floor coverings, hot water system, air-conditioning units and so on.

The amount of these deductions depends on the age, size and quality of the property, however generally they're in the order of $1000 to $8000 per annum for a residential property.

Under current Australian taxation legislation deductions are allowed for the depreciation of residential dwellings built after July 18, 1985, including structural improvements built after February 26, 1992 (claimable under Division 43) and fixtures and fittings of any age (claimable under Division 40).

The amount of depreciation claimable for each item depends on the age and quality; however in many cases total deductions for a modern house are in the order of $4000 to $6000 per annum, while an older house may still receive $1000 to $2000 per annum in deductions. This is a significant tax deduction each year!

Plant and Equipment (P&E) can also be depreciated in a commercial building, including floor coverings, air-conditioning, exhaust fans, staff amenities etc. In Division 40, the P&E is depreciated at an accelerated rate; thus greater than the flat rate provided by Division 43.

Under relevant legislation, P&E can be revalued and given a new effective life from the date of settlement; meaning for each new owner, the clock starts afresh.

Furthermore, depreciation schedules can be backdated so investors can claim up to two previous years of depreciation in one year.

Ninety-eight percent of investment properties can be depreciated, meaning virtually every property investor can benefit from getting a depreciation schedule. Even though a building may not qualify for capital allowance because of its age, there will almost always be worthwhile deductions under P&E to deliver savings to the investor.

Also, if you purchase an investment property and immediately start renovations, this is deemed to be improving the capital value of the property and will attract 2.5 per cent depreciation. Renovations completed by previous owners are also depreciable.

Source: Herron Todd White

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