Accountants aren't qualified to work out what you can and can't claim on depreciation
and will often refer you to a Quantity Surveyor such as ourselves.
Hi guys, Tuan from Duo Tax here.
If you own an investment property, there are two types of depreciation you can claim. These
are Division 40, which is plant and equipment of your rental property, and Division 43 which
is capital works, which is your building depreciation.
What is Division 40 plant and equipment? Plant and equipment refer to items that are
fixtures and fittings, usually known as assets that are easily removable from the property.
For example, air conditioners, fridges, dishwashers and washing machines. Each item has its own
effective life that is measured in years set out by the ATO.
With Division 40 items, you can depreciate them using either the diminishing value or
the prime cost method. Although the end value is the same, many individuals select the diminishing
value method for depreciation as your items depreciate at a more rapid rate within the
first few years.
For example, a dishwasher has an effective life of 10 years. It depreciates at a rate
of 20% of its current value per year until it reaches a value of less than $1,000. When
the value is below $1,000, the depreciation rate increases to 37.5% as per low-value pooling.
Which means that you get more value back sooner.
What is low-value pooling? A low-value asset is an asset that has depreciated
over one or more years and now has a depreciable value of less than $1,000, but only if you've
previously worked out deductions for it using the diminishing value method.
You calculate the depreciation of all the assets in the low-value pool at the annual
rate of 37.5%.
If you acquire an asset and allocate it to the pool during an income year, you can calculate
its deduction at a rate of 18.75%. That is half the pool rate in that first year alone.
This rate applies regardless of at what point during the year you allocate the asset to
the pool.
Something to know is that there was a recent legislative change to the Federal Budget in
2017. The changes meant that income tax deductions for depreciation of previously used plant
and equipment in rental properties used for residential accommodation are no longer allowed.
If you've acquired a brand new plant and equipment after 7.30pm on 9 May 2017 or entered a contract
to purchase the property before this time, you can continue to claim a deduction over
the effective life of the asset. These changes are only applicable to residential property
investors and therefore don't impact commercial properties.
What is Division 43 Capital Work Deductions? Division 43 capital works refer to the depreciation
of the structure of the building, usually objects that are not removable.
Examples of capital works are driveways, fencing, garage, painting, roofing, tiling and even walls.
Residential properties built after this date, 15 September 1987 are eligible to claim division
43 capital works deductions over a 40-year period which will be depreciated at 2.5% per year.
When construction costs are unknown, a qualified specialist such as a Quantity Surveyor will
be responsible for estimating the building.
When it comes to figuring out what you can and can't claim, this becomes quite complex
because every asset has its own effective life and depreciation rate. Accountants aren't
qualified to work out what you can and can't claim on depreciation either and will often
refer you to a Quantity Surveyor such as ourselves.
Quantity Surveyors like us at Duo Tax are ATO-approved and are the only professionals
that can produce a compliant report, that is a tax depreciation schedule, so that you
can claim on division 40 and division 43 for your investment property.
If you want to learn more about what you can claim for your property, please contact one
of our friendly staff members at Duo Tax.