image source: nationalsterling.com.au
A lot of the time, depreciation is overlooked especially when it comes to properties. Not many people know that they can legally minimise taxation by claiming depreciation hence losing a lot of money they would have saved along the way. So why don’t people claim tax depreciation? Well the answer has to be because they obviously do not understand that it is perfectly legal or they don’t realise the amount of money they could be saving from depreciation.
While it is true that a property is an asset, what most people don’t realise is that in the same way cars deprecate in value, so do property investments. If for example you have a property that you use to generate income, TO or the Taxation Office actually allows you to claim back the property’s declined value in form of tax deductions. This amount however varies and is subject to factors such as the original date of your building’s construction. Currently, you could get 2.5% or even a 4% deduction on the building’s capital works component. TO also recognises that various components in the building have a shorter lifespan and these include equipment such as smoke detectors, a/c units, blinds and other similar items. In addition to the flat depreciation rate given, such items are given what is known as an accelerated depreciation rate. Common property areas like the stairways and corridors could also be claimed. In a nut shell, you are supposed to be utilising the benefits that come with this depreciation provision.
Having said this, a lot of property owners are probably wondering what exactly is in a tax depreciation schedule. Well, there are two elements that can be taken into consideration and these are: plant and equipment as well as capital works allowance. Under plants and equipment, you have items such as light fixtures, security systems, a/c units, hot water systems, solar panels, filtration systems, heaters and removable floor coverings such as carpets. About 15-35% of construction costs ideally go to plant and equipment items especially in residential buildings. You can therefore maximise their value by claiming their depreciation. This deduction is provided for removable assets and as TO recognises, they tend to depreciate much faster than the property itself. When it comes to capital tax allowance, you are looking at the building’s structural elements and these mainly include irremovable items as opposed to the removable ones in plants and equipment. The age of the building also comes into play and as mentioned earlier you could either claim 2.5% or 4%.
So how do you go about enjoying these tax deductions? Well tax depreciation schedules are prepared by quantity surveyors. The property will first have to be inspected before the necessary records are compiled. Photographs are also taken to substantiate the claim with the TO. After all examination documents are in order, a tax depreciation schedule is prepared and this is usually done no more than a week after the inspection. Go ahead and claim your deduction on your residential or investment property.
