Tuan Duong is the Principal and Founder of Duo Tax Quantity Surveyors. His passion is educating property investors in the power of tax depreciation and the benefits it can offer in helping them minimise their tax liability. Tuan is also a professional member of the Australian Institute of Quantity Surveyors and is a Registered Tax Agent, authorised to offer advice on all matters related to depreciation.
As an Australian property investor, it’s important to be aware of all the different ways you can save on taxes, and one way to do this is by taking advantage of tax depreciation.
When you purchase an investment property, you can claim a depreciation deduction for its structural components and any plant and equipment items that come with it. This is worth knowing as it can add up to substantial savings over the life of the property!
To maximise your tax depreciation deduction, it’s important to engage a Quantity Surveyor to prepare a depreciation schedule for your property. They will determine the eligible amount you can claim each year, which can help you save big at tax time.
What is a Tax Depreciation Schedule?
A tax depreciation schedule is a document that outlines the eligible deductions for the depreciation of an investment property. The schedule is completed by a Quantity Surveyor and takes into account the age, condition and construction method of the property.
It allows investors to claim a deduction for the wear and tear of their property over time, which can result in significant savings come tax time. A tax depreciation schedule can be completed for both new and established properties and can be an invaluable tool for maximising your return on investment.
What Types of Depreciation Deductions Can You Claim Using a Tax Depreciation Schedule?
When it comes to claiming tax deductions in Australia, there are two main types of depreciation deductions that you can take advantage of – capital works and plant and equipment.
Capital works deductions can be claimed for the decline in value of buildings, while plant and equipment depreciation can be claimed for the decline in value of assets within the property.
For example, you can claim capital works deductions (also referred to as division 43 deductions) on structural components such as bricks and mortar and retaining walls. On the other hand, you can claim plant and equipment deductions (also referred to as division 40 deductions) on assets such as carpets, air conditioning units and ovens.
To calculate your deduction, you will need to determine the asset’s effective life and value at the end of the financial year. You can then claim a percentage of the asset’s value as a deduction each year.
In general, residential buildings built after September 1987 have an effective life of 40 years. Investors can claim a 2.5% capital works deduction for each year they own a property, however, division 40 assets depreciate much quicker, so the ATO assigns an effective life for each asset.
For example, an air conditioning unit with a split system has an effective life of ten years.
Depreciation is a non-cash deduction, which means that it does not require any outlay of funds by the investor. All that is required is for the investor to engage a Quantity Surveyor to prepare a depreciation schedule.
A Case Study: Paul Saved $6,031
Property Investor Paul* (we have changed his identity) purchased a brand new house for $680,000 one year ago and rented it out immediately. Since brand new properties offer significant tax deductions, he decided to reach out to a quantity surveyor and order a tax depreciation schedule.
Paul requested what his cash position would look like if he didn’t order a tax depreciation schedule. Interestingly, he went from being in a negative cash flow position to generating some positive cash flow from his investment property. According to their depreciation schedule, they could claim $16,300 depreciation in their first year.
Without depreciation, Paul had to pay $90 out of his own pocket each week. However, by taking advantage of the Australian Tax Office’s tax breaks and making a depreciation claim, he went from covering the loss to actually generating $26 each week.
The great thing about his depreciation schedule is that it’s valid for up to 40 years! So Paul can continue saving money each year as long as they continue to own the property.
Key Takeaways On How To Use Depreciation For Tax Reductions
Property tax depreciation is a deduction that can be claimed by investors on the wear and tear of their investment property. This deduction can be a significant saving for investors, as it allows them to offset the cost of maintaining their property against their taxable income.
The amount that can be claimed depends on the age and type of property, but it can be a substantial sum over the life of an investment.
Unfortunately, it’s often an underutilised and overlooked tool.
But as you can see from Paul’s scenario, utilising a depreciation schedule can save you thousands of dollars each year in taxes. So, if you’re looking to maximise the return on your investment, consider getting in touch with a qualified Quantity Surveyor.
