June 30, 2024 Published by Mandy Peck

Property depreciation is the wear and tear of a building and its fixtures and fittings over time. For any income-producing property, the Australian Tax Office (ATO) allows property owners to claim this depreciation as a tax deduction each financial year.

A tax depreciation schedule is required to maximise the depreciation deductions available and to substantiate the deductions in a tax return.

According to BMT Tax Depreciation

Research shows that 80% of property investors are failing to take advantage of property depreciation and are missing out on thousands of dollars in their pocket

Residential investment properties are recommended to have a tax depreciation schedule to claim maximum investment property tax deductions. A comprehensive tax depreciation schedule can see benefits greatly enhanced over the life of the property. Successful property investors are already maximising their claims through a depreciation schedule

There’s an overwhelming amount of information on managing a property portfolio out there. BMT believes that when it comes to property depreciation advice, the best approach is keeping to the facts.

Tax depreciation is the highest non-cash deduction

Tax depreciation is a non-cash deduction, meaning investors don’t need to spend any money in order to claim it.

Overall, property depreciation is the second-highest deduction available for property investors. Depreciation comes second only to costly mortgage interest repayments.

• New and old properties hold depreciation

Most investment properties, both new and old, hold property depreciation deductions. Whether the property is a house, apartment, townhouse, is brand-new or was constructed twenty years ago, depreciation deductions will be available.

Unfortunately, many investors rule out claiming depreciation as they believe their property is too old.

• Legislation changes don’t affect capital works claims

The legislation changes made in 2017 mean that owners of second-hand properties purchased after 9 May 2017 can’t claim depreciation on previously used plant and equipment assets. They can still claim plant and equipment deductions on any new assets they purchase for the property.

It’s important that investors remember that the legislation change doesn’t impact their eligibility to claim depreciation deductions for qualifying capital works. On average, capital works deductions make up 85 to 90 per cent of the total depreciation claim.

• Legislation changes don’t affect substantially renovated property

A substantial renovation is where all, or substantially all of a building is removed or is replaced. Some key examples of substantial renovations includes replacing foundations of the building, walls, floors, the roof or staircases.

When an investor purchases a second-hand property directly after its substantial renovation, the 2017 legislation changes don’t apply. This means the new owner can claim depreciation on all new plant and equipment assets and the capital works.

• The immediate deduction boosts cash flow

Investors can further boost their cash flow by claiming the immediate deduction on eligible assets valued up to $300.

This immediate deduction can be claimed in the year of purchase and there’s no limit to the amount of assets that can be claimed. This means that if they are eligible, the investor can potentially boost their cash flow by thousands.

• Low-value pooling accelerates depreciation

Low-value assets that aren’t eligible for the immediate deduction are often placed in the low-value pool.

Low-value pooling allows owners to claim depreciation at an accelerated rate. When a plant and equipment item is allocated to the low-value pool, it can be depreciated at a rate of 18.75 per cent in the first year and 37.5 per cent each following year.

An item can only be included in the low-value pool if it is a low-cost or low-value asset.

• Low-cost asset: opening value of $1,000 or less
• Low-value asset: a written down value of $1,000 or less. When an asset’s opening value was more than $1,000 but the residual value is now less than $1,000.

• Hidden deductions are found in common property

When an investor buys a property that is an apartment or townhouse in a complex, it is often under a strata title.

Owners of these properties can claim an apportioned deduction of the common property items under the strata. Some key examples include elevators, gym equipment and carparks.

A specialist quantity surveyor determines the value of these assets for depreciation purposes by defining the owner’s interest in the asset. Given that depreciation is only available for this portion, the asset often falls into the low-value pool or qualifies as an immediate deduction.

• Site inspections are a key step to maximising compliant claims

Both the National Tax and Accountants’ Association (NTAA) and the Australian Institute of Quantity Surveyors (AIQS) recognise that physical site inspections are essential to claiming maximum compliant deductions. Failing to do so often results in missed deductions or errors made on the tax depreciation schedule.

Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.