DEPRECIATION & PROPERTY

There are a few key things that all investors must know about the relationship with depreciation and property.

You should know what it is and how it can be utilised to reduce your taxable income.

According to the Australian Tax Office (ATO), a depreciating asset is defined as:

"An asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.”

Under the Australian tax laws, owners of investment producing properties can claim an offset for the decline in value of the asset due to wear and tear.

Furthermore, Australian law allows investors to claim tax deductions on both the decline in value of the building’s structure/capital works (Division 43) and plant and equipment assets, which can be easily be removed from the property; more commonly known as “fixtures and fittings” (Division 40.)

Under current legislation (February, 2020), owners of second-hand residential properties which exchanged contracts after 9th May 2017 cannot claim deductions for previously used plant or equipment assets.

For capital works deductions, the ATO states:

“You can claim a deduction for the full cost of the estimate in the year it is incurred. Deduction rates of 2.5% or 4.0% apply, depending on the date on which construction began, the type of capital works, and how they're used”

Some examples of what is can be accounted for in a depreciation report.

Division 40 - Plant and equipment

• Air conditioning unit

• Blinds and curtains

• Hot water unit

• Security and alarms systems

• Carpet

• Light shades

• OvenRangehood

• Ventilation fan

• Solar panels

• Heating units

Division 43 - Capital works

• Driveways

• Fencing

• Clothes line

• Garage

• Paint

• Fixed bathroom furniture such as; baths, basins and cupboards

• Kitchen cabinetry

• Roofing

• Tiling

• Walls

For further reading please visit the links below:

• ATO Rental Properties 2019 - A guide for rental property owners

• BMTQS - Tax Depreciation Overview

• Duo Tax - Division 40 & 43 differences

Bradley Wearne - General Manager & Head of Research at Meridian Australia

P: (02) 9939 3249

E: [email protected]

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References

[1] ATO 2019 - Guide to depreciating assets