Tax Depreciation - Investors

Construction Cost Planning Services

FAQ's - Tax Depreciation - Investors

1.1 Why does the depreciation schedule only last 40 years? To Top

From the date of construction completion, the ATO has determined that any building eligible to claim depreciation has a maximum effective life of 40 years. Therefore, investors can claim up to 40 years depreciation on a brand new building, whereas the balance of the 40 year period from construction completion is claimable on an older property.

1.2 How can BMT & ASSOC tell me how much something costs especially how much it cost to build my house 10 years ago? To Top

Quantity Surveyors are one of the few professionals recognised by the ATO to have the appropriate construction costing skills to calculate the cost of items for the purposes of depreciation.  BMT & ASSOC also prepare cost plan estimates for all types of buildings. That ensures we have the complex skills and data required to accurately estimate construction costs. Construction costs are estimated in today’s market and historically written down to the year of construction using yearly cost indices.

1.3 What is the difference between Prime Cost and Diminishing Value methods of depreciation? To Top

Two methods can be applied when depreciating property, the Diminishing Value (DV) and Prime Cost (PC) method.  The intentions of the property investor will determine which depreciation method will be most suitable for them. 
Under the diminishing value method the deduction is calculated as a percentage of the balance you have left to deduct. The formula for calculating depreciation using the diminishing value method is:

*Note: On average this change will increase the rate of depreciation by 33%.

Under the prime cost method the deduction for each year is calculated as a percentage of the cost. The formula for determining the amount of depreciation deduction under the prime cost method is:

1.4 Which depreciation method is best for me? To Top

Depends on how you want to claim. 
If you claim using the Diminishing Value Method (DV), you are claiming a greater proportion of the assets cost in the earlier years of the effective life. For example, if the owner purchased the property for the purposes of a short term investment and planned to sell it in approximately five years time, the DV rate would be a more attractive option to take, as it provides higher returns over the earlier years.  If you claim using the Prime Cost Method (PC), you are claiming a lower but more constant portion of the available deductions over the life of the property. If the owner was intending to retain ownership for a longer period of time then the PC option may be more suitable, as it provides a constant projection of what the investor’s tax deductions will be.

Our experience shows that most investors employ the diminishing value method, as depreciation deductions under this method are cumulatively higher over the first five years of ownership.

1.5 Can I use this Tax Depreciation Report for insurance purposes? To Top

No. A depreciation report highlights the available depreciation of the building and plant items, not the replacement costs of the property. A Replacement Cost Estimate (RCE) is required for insurance purposes and is another service available from BMT & Assoc. The RCE report covers considerations such as:

• Demolition and removal of debris and materials and the associated consultant fees;
  
• The cost of constructing a new building of the same size and quality, taking into consideration planning constraints and building codes;
  
• All consultants fees and all preliminaries fees and charges; and
  
• Cost Escalations for:

1. Assessment of damage and claim finalisation,
2. Lead time of planning,
3. Design and documentation,
4. Calling of tenders and tender evaluation,
5. Construction and fit out period, and
6. Time lapse between policy renewal dates.

1.6 If my property was built before 1985, is it too old? To Top

No. It is not commonly known that:

• Your investment property does not have to be new:   Both new and old properties will attract some depreciation deductions.  A common myth is that older properties will attract no claim.
• You can adjust previous year’s tax returns: When a property owner has not been claiming or maximising tax depreciation deductions, currently up to the previous four financial year’s tax returns can be adjusted and amended.

*Note: if there are no deductions available we don't go ahead with the report.

1.7 How do you work out how old the building is? To Top

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. Similar methods are used Australia wide, however some properties are privately certified. BMT & ASSOC conduct the relevant searches required to accurately estimate the age of a building. These include historical council searches regarding lodged development applications, as well as Occupancy Certificates and certified final inspections.

1.8 What is pooling? To Top

Low Cost pool - A low cost asset is a depreciable asset that has an opening value of less than $1000 in the year of acquisition.

Low Value Pool - A low value asset is a depreciable asset that has a written down value of less than $1000. That is, if the opening value of an asset is greater than $1000 in the year of acquisition but the value remaining after depreciating over time (opening value less depreciation in year 1 less depreciation in year 2 etc) is now less than $1000. Assets meeting this classification are placed in an itemised pool.

Pooling is used in conjunction with the diminishing value method to maximise deductions in the first 5 years of the depreciation schedule.

1.9 Why is plant and equipment itemised? To Top

The ATO specifies an individual effective life for all  plant and equipment items. Our reports consequently show the estimated cost for each item and its contribution to the depreciation total per financial year. The original building structure and capital improvements, or Division 43, are all depreciated at the same effective life rate, consequently individual costs for these items aren’t expressed in the report. If required by the ATO, the estimates for division 43 can be justified.

1.10 Can I claim renovations done by the previous owner? To Top

Yes.  Anything in the property that is part of a previous renovation will be estimated by our quantity surveyors and depreciated accordingly.  This includes items that are not obvious e.g. New plumbing, water proofing, electrical wiring etc. For capital improvements to qualify for the Division 43 construction write off allowance, they must be completed after the 27th of February 1992.

1.11 Can I use a Tax Depreciation report as a market Value? To Top

No. A market value is a service that only a registered valuer can provide. Quantity Surveyors estimate construction costs as well as estimating costs for plant and equipment items.

1.12 What deductions can I claim? To Top

All ATO specified plant and equipment items and building write-off allowance (where the building qualifies) can be claimed.

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

Plant and equipment items are basically items 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 includes items that are mechanically or electronically operated, even though they can be fixed to the structure of the building. Plant and equipment items include( but  are not limited to):

• Hot Water Systems
• Carpets
• Blinds
• Ovens
• Cooktops
• Rangehoods
• Garage Door Motors
• Door Closers
• Freestanding Furniture
• Air Conditioning

 The building write-off allowance is based on historical building costs and includes things such as the bricks, mortar, walls, flooring, wiring etc

1.14 What info do I need to provide? To Top

Information we require to produce a Tax Depreciation and Capital Allowance report includes the following:

• Your settlement date
• Purchase price
• Access Details for Inspection (E.g. Property Manager or Tenant Details)
• Any information pertaining to improvements or additions made to the property including dates and costs where available
• The date the property became income producing (if you have lived in it as your primary place of residence previously)

1.15 What does the report contain? To Top

A detailed 23-page schedule including the following components:

1. A method statement;
2. Schedule of Diminishing Value Method of Depreciation;
3. Schedule of Prime Cost Method of Depreciation;
4. Schedule of pooled items for the property
5. Lists all Division 43 (10C & 10D) allowances available from the property;
6. Detailed 40 year forecast table illustrating all depreciable items together with building write off for both Prime Cost and Diminishing Value methods;
7. Comparative table of the two methods of depreciation;
8. Common property items within strata or community title complexes such as lifts and swimming pools are included in the depreciation report for a unit in a multi-unit development;
9. The report is structured to facilitate the client to be able to amend previous years' returns to re-coup unclaimed depreciation benefits; and
10. The report is pro-rata calculated for the first year of ownership based on the settlement date so that the accountant has the exact depreciation deductions for each year.

The report will ensure maximum depreciable items are identified and will take into account the pooling of low value items under the uniform capital allowance system.  It  is valid for the life of the property, until capital improvements are undertaken.

Disclaimer:This information should be read subject to the following conditions:

•Information is published as a matter of interest only and is not intended to be relied upon by readers.  In any situations which may be similar to matters herein readers should exercise and rely upon their own judgement.
•Neither BMT & ASSOC Pty Ltd nor any of its officers or employees bear any responsibility for any error in the material published here or in any previous publication, or for any damage or loss resulting from any reliance on any material published here or in any previous publication.
•These FAQ's are issued as a helpful guide and is not intended to, and does not cover all aspects of the topics discussed.  Professional advice should be sought before any action upon these topics is undertaken.