So you’ve bought a property and your accountant or someone you know has
told you that you need to get a tax depreciation schedule.
But what is tax depreciation?
Hi guys, Tuan Duong, founder of Duo Tax, here for another video designed to help you
become a better property investor. You hear about tax deductions,
depreciation, low-value pooling and all this jargon,
but no one ever really explains what tax depreciation fundamentally is.
And if you're a property investor, what should you do to take advantage of tax depreciation?
Put it simply, depreciation is the wear and tear that occurs
as things get older. And as items get older, the value of these items also decreases in value.
This is depreciation.
Where tax gets involved, is that you can claim the loss in value as a tax
deduction against your income when you lodge your tax return to help lower how
much tax you need to pay or to increase how much of a tax refund you can claim back.
But, before we start, we want to be clear that this video is for informational purposes.
In no way should you interpret this as tax advice.
We always recommend working with a qualified financial advisor or tax agent to give you
the best advice for your situation. When it comes to property investing,
which is where Duo Tax specialises in, there are two classes of depreciation you can claim.
The first being Plant and Equipment,
known as Division 40 such as your fridges, washing machines, air conditioning units,
basically anything that you can remove easily from the property or is motorised.
Then, you’ve got Capital works, known as Division 43 is the other asset of depreciation,
which are your fixed items like your building, driveway, roof and walls.
What a lot of investors, mainly first-time investors, don't realise is that you can
claim a lot of the tax depreciation based on these two things alone.
The ATO provides a Tax Ruling
called an effective life schedule that outlines the effective life of an asset.
This is how long the ATO deems a particular asset is generally used to produce income.
For example, an air conditioning unit has an effective life of 15 years.
From this, we can calculate the rate that we can depreciate
the asset either the diminishing value or prime cost method.
If you want to learn more about depreciation methods,
you can check out our other video that talks about this.
It's critical to understand that you can only claim depreciation
if your investment property is a rental property, and it’s used purely for investment purposes.
If you're living in it as your primary place of residence, you won't be able to claim
tax depreciation on the property until you vacate it and start renting it out.
So how do you claim tax depreciation?
For your property, you'll need a tax depreciation
schedule prepared by a qualified quantity surveyor like us here at Duo Tax.
You can't get your accountant to do this because it requires a qualified expert in
the form of a quantity surveyor to give you an accurate report that's compliant with the ATO.
Once you receive this report, if you have an accountant,
you would give this to them, and they'll make these depreciation claims when they
lodge your tax return at the end of each financial year.
If you don't have an accountant, you can do it yourself, but we always recommend that
you use them to make sure you don’t miss out on these deductions that you're eligible for.
So, who needs to get a tax depreciation schedule?
Here are some scenarios that most often come up with our clients:
You've bought a rental property that's either new or off-the-plan.
You've switched your property from a primary place of residence to a rental property - you
can claim depreciation from the date you vacate the property and have it available for rent.
You run your business from home - you can claim a portion of your
home expenses as a tax deduction as well as depreciation on your home.
You've bought a residential property, and you've entirely or partially demolished
the house to renovate it - you can claim scrap value that’s residual,
that’s left over in this property, and these are deductions for areas such as the kitchen
or your house as well as for any other newly installed assets.
You've purchased a new commercial space that you plan to lease out to somebody or a tenant.
You've purchased a new commercial space to use for yourself as an owner-occupied business premises.
You can potentially claim immediate write-offs allowable by the Tax Office.
If you're in doubt about whether you should get one, speak to a quantity surveyor
or your accountant to find out if it's worthwhile.
So, when is the best time to purchase a tax depreciation schedule?
When you're approaching settlement of your new rental property and have tenants moving into it.
It's ideal to organise to have a quantity surveyor go in
before the new tenants move in to avoid disrupting them.
Just before the end of the financial year,
so that your accountant can have all the information on hand to lodge your tax
return immediately after you receive your Notice of Assessment or Group Certificate.
You're planning to vacate your home and turn it into a rental property. Again,
organise a quantity surveyor before having tenants move in.
I hope this has given you enough information and a good idea of what tax depreciation is.
If you're a property investor, old or new, and you haven't taken advantage of tax depreciation,
get in touch with our staff at Duo Tax for us to help you.