What is depreciation?

As a building gets older and items within it wear out, they depreciate in value. The Australian Taxation Office (ATO) allows property investors to claim a tax deduction relating to the building and fixtures it contains. Depreciation can be claimed by any owner of an income producing property. This deduction essentially reduces the investment property owner’s taxable income.

If a residential property was build before 1987 is it too old?

No, investment properties do not have to be new. Both new and old properties will attract some depreciation deductions; it is a common myth that older properties will attract no claim. Previous year’s tax returns can also be adjusted. If a property owner has not maximised their depreciation deductions, the ATO allows adjustments to tax returns up to two financial years old.

How does BMT calculate a building’s age?

The age of the building can be determined by obtaining council documents with dates pertaining to the original application approval date or the occupancy certificate date and final inspection date. The Quantity Surveyor will conduct the relevant searches to accurately determine the age of a building. This includes historical council searches regarding lodged development applications, as well as occupancy certificates and certified final inspections.

What is the difference between plant and equipment and the building write-off allowance?

Plant and equipment items are assets that can be ‘easily’ removed from the property, as opposed to items that are permanently fixed to the structure of the building. Plant items also include electronically or mechanically operated assets, even though they may be fixed to the structure of the building.

Plant and equipment items include, but are not limited to:

  • Carpets
  • Ovens
  • Rangehoods
  • Door closers
  • Freestanding furniture
  • Hot water systems
  • Blinds
  • Cook tops
  • Garage door motors
  • Air conditioning systems

The building write-off allowance (also known as division 43) is based on the historical construction costs of the building and includes such items as bricks, mortar, walls, flooring and wiring.

Why does the depreciation and capital allowance schedule last forty years?

The ATO has determined that any building eligible to claim the building write-off allowance has a maximum effective life of forty years from the date construction was completed. The owner can generally claim up to forty years depreciation on a brand new building, whereas the balance of the forty year period is claimable on an older property.

Can the building owner claim renovations completed by the previous owner?

Yes. Anything in the property that is part of a previous renovation will be estimated by our Quantity Surveyors and deductions calculated accordingly. This includes items which may not be so obvious, for example, new plumbing, water proofing and electrical wiring. For capital improvements to qualify for the division 43 building write-off, they must have commenced construction within the qualifying dates.

What is pooling?

Low-value pooling is essentially a method of depreciating plant items within an investment property at a higher rate to maximise the deductions more quickly. The following categories of depreciating assets can be allocated into a low-value pool and claimed at a higher tax rate to maximise deductions:

Low-cost pool: A low-cost asset is a depreciable asset that has a cost of less than $1,000 in the year of acquisition.

Low-value pool: A low-value asset is a depreciable asset that has an un-deducted value of less than $1,000. That is, the cost of the asset is greater than $1,000 in the year of acquisition, but the value remaining after depreciating over time (opening value less the deductions in year one, less the deductions in year two, etc) is now less than $1,000. Assets meeting both of these classifications can be placed in an itemised pool. Pooling is used in conjunction with the diminishing value method to maximise deductions in the initial years of the depreciation schedule.

Who is qualified to estimate construction costs for depreciation purposes?

Quantity Surveyors are qualified under the tax legislation TR97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation schedules. Ensure a depreciation specialist like BMT Tax Depreciation is used to prepare a depreciation schedule as part of your property investment services.

Article provided by BMT Tax Depreciation.

Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.