Depreciation can sometimes seem a bit confusing, particularly if it’s your first time hearing about it or you’re ordering a depreciation schedule for the first time.
To help you out, we’ve compiled this ‘A-Z of depreciation’ glossary of the main terms you are likely to come across.
Australian Taxation Office (ATO) – The ATO sets the tax rulings for depreciation. These rulings state what assets depreciation can be claimed for, the rate at which items assets depreciate, the qualifying dates of assets and their effective lives.
Capital Gains Tax (CGT) – The CGT is a tax that property investors may face when it comes time to sell their property one day. It is essentially the tax payable on the difference between what it cost you to purchase an asset (plus associated transaction costs) and the amount you received when you disposed of it (minus associated transaction costs). When you sell a property, this triggers what is called a ‘CGT event’ and the owner will either make a capital gain or loss on the property. Click here for more information on CGT and to learn what exemptions are available to property investors.
Capital improvement – A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase, usually through a renovation or improvement. This must then be classified as either a capital works deduction and depreciated over time or as plant and equipment depreciation. It differs from a repair or maintenance – both of which can be claimed as a 100 per cent tax deduction in the year of the expense.
Capital works allowance – Capital works allowance or ‘building write-off’ is a deduction available for the structure of the building and the items within it that are deemed irremovable. Also referred to as ‘division 43’, capital works deductions can be claimed at a rate of 2.5 per cent over forty years.
Diminishing value – The ATO allows investors to choose between two methods of claiming depreciation on plant and equipment assets. The diminishing value method is one method of claiming depreciation (see ‘Prime cost method’ for the other option). Under this method, the deduction is calculated as a percentage of the balance you have left to deduct. If an investor makes their claim using the diminishing value method, they are claiming a greater proportion of the asset’s cost in the earlier years of the effective life of the asset as set by the ATO, therefore receiving greater deductions in the earlier years of owning the property.
Divisions 40 and 43 – Division 40 refers to the plant and equipment assets within a property while division 43 refers to capital works allowance or building write-off.
Estimate – Property investors can obtain an estimate of the likely depreciation deductions for their investment properties, free of charge from BMT. This can assist potential buyers in their pre-purchase budgeting and help them decide if a property is the right investment for them.
Immediate write-off – Assets that have an initial value of less than $300 are eligible for immediate write-off in the year they were purchased.
Low-value pool – Low-value pooling legislation allows owners to group qualifying depreciable assets in a pool which will depreciate at an accelerated rate. Property investors who acquire low cost assets and choose to place them in the low-value pool are able to claim them at a rate of 18.75 per cent in the year of purchase regardless of how long the property has been owned and rented. From the second year onwards the remaining balance of the item can be claimed at a rate of 37.5 per cent per year.
Low-cost assets – A low-cost asset is a depreciable asset that has an opening value of less than $1,000 in the year of acquisition.
Low-value assets – A low-value asset is a depreciable asset that has a written down value of less than $1,000. That is, the value of the asset is greater than $1,000 in the year of acquisition. However, the residual value after previous years’ depreciation is less than $1,000.
Maintenance – Maintenance is considered work completed to prevent deterioration to a property, for example oiling a deck. Deductions for maintenance can be claimed as an immediate write-off in the year an expense is incurred with the help of an Accountant.
PAYG withholding variation – A Pay As You Go (PAYG) withholding variation allows investors to take advantage of depreciation deductions throughout the year, instead of in one lump sum at the end of a financial year.
Partial year claim – The total depreciation available in the first financial year of owning a property is adjusted according to the portion of the year the property is owned. A depreciation schedule should include a partial year claim based on the time the property is rented.
Plant and equipment* –These are the removable assets found within an investment property. Examples of division 40 items that owners can claim depreciation deductions for include lights, blinds and ceiling fans. These assets depreciate according to an individual effective life and therefore depreciate at a much faster rate than structural items.
* Under new legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. To learn more visit bmtqs.com.au/budget-2017 or read BMT’s comprehensive White Paper document at bmtqs.com.au/2017-budget-whitepaper
Prime cost method – The prime cost method of depreciation uses a lower percentage rate of depreciation and results in a consistent deduction each year, spreading out the deductions more evenly over time.
Repairs – Repairs are considered work completed to fix damage or deterioration to a property, for example, replacing part of a damaged fence. Deductions for repairs can be claimed as an immediate write-off in the year an expense is incurred with the help of an Accountant.
Qualifying date – As a general rule, any residential building where construction commenced after the 15th of September 1987 will entitle their owner to capital works deductions at a rate of 2.5 per cent per year for up to forty years. For commercial properties, the qualifying date for this capital works allowance is the 20th of July 1982.
Quantity Surveyor – Quantity Surveyors are one of a few professionals recognised by legislation (Tax Ruling 97/25) to have the appropriate construction costing skills to calculate building costs for capital allowance claims. Specialist Quantity Surveyors utilise a combination of construction cost expertise and knowledge of taxation legislation to concentrate on property depreciation.
Schedule – A BMT Tax Depreciation Schedule outlines all of the depreciation deductions in a property that an investor can claim.
Scrapping – Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In the year the item is scrapped, the full remaining written down value can be written off as a tax deduction.
Split report – Split reports are available when a property is owned by more than one person and can result in higher deductions earlier.
Hi Team, I have 2 questions to my scenario. Can a property owned by a church (?1.non profit organization)that was specifically used as a manse(Home of the minister) that is now used as a rental property claim depreciation?2. It is rented through an agent.
Cheers
Sue
Hi Sue,
Thanks for your comment.
As this property is owned by a non for profit organisation, it makes the situation a bit more complex. In this scenario, depreciation cannot be traditionally claimed, so it is best to speak with an Accountant to determine the best course of action in line with your investment goals.
Thanks,
BMT Team
Hello
I bought an apartment off-the-plan in 2014. Settlement occurred January 2018. I have since rented it out, but am now considering whether I should sell it. I understand that I can claim depreciation as I bought it from new, plus the contract was in place prior to the depreciation changes. But, I suppose what I want to know is, if I don’t claim the depreciation can the next owner claim it instead even though the property is second-hand? I would like to market the property to investors and feel that this would make a difference.
Thanks
Carmel
Hi Carmel,
Thanks for your comment.
Unfortunately, if you choose to sell your apartment, an investor buyer would not be able to claim any depreciation for plant and equipment assets as they would be considered second-hand. They would, however, be able to claim the capital works deduction, or building write-off.
Given the property was only recently built, they’d still be able to claim capital works deductions for nearly the whole forty-year period. This would be beneficial for many investor buyers.
Please also note that depreciation can only be claimed by the new owner if they use the apartment for income producing purposes (ie as an investment property).
Thanks,
BMT Team
Dear Team,
Thank you for this email. I wish to ask the team about a deduction for painting my duplex this year or early next year whilst the tenant is still in place. My accountant just happened to tell me at tax time I could get the entire place painted before I move in this July or July 2018. He further stated that the full cost of the painting is immediately deductible in the tax year that is applicable. As I had to find out about your service by reading the ATO website I am wondering what other items could be written off apart form the depreciation items immediately before I take over possession. Thanks Catherine
Hi Catherine,
Thank you for reading!
Basically, any asset that cost less than $300 can be immediately written off in the year it is installed. So what you will be able to have written off depends on how much you spend.
As for other expenses outside the depreciable assets, you should generally be able to claim any expenses relating to the management and maintenance of the property, such as property management fees. You could also claim rental expenses or other income such as salary, but only if negatively geared. If you’d like to learn more, this link shows a range of things that can be claimed as an immediate deduction, aside from depreciable assets – https://www.ato.gov.au/General/Property/Residential-rental-properties/Expenses-deductible-immediately—management,-maintenance,-interest/
Thanks,
BMT team
Hi there,
Just a few enquiry in relation to Split report.
Will this mean that your professional fee will be more expensive than non-split report?
Many thanks,
Grace
Hi Grace,
Thanks for getting in touch regarding split reports.
No, there is no additional fee when you request a split report from BMT. Our fee is the same regardless of whether it is a split report or a standard tax depreciation schedule for one owner.
If you have any further questions or would like to know more about split reports, feel free to get in touch with us on socialmedia@bmtqs.com.au
Thanks,
BMT team
GCT investment property rented out 11years property since purchased date (11/08) and has never been resided by owner and to become aPlace of Residence in due course (retired) and to be left to beneficiaries upon my passing what % of GCT will the beneficiaries have to pay once they inheriate the property and decide to sell within a 2 year period.
Carmen
Hi Carmen,
Thanks for getting in touch.
This is something best discussed with your Accountant.
From our understanding, death does not generally produce an immediate realisation of a taxable gain or loss on assets held by the deceased for Capital Gains Tax (CGT) purposes. However if assets of the estate pass to a beneficiary who is an exempt entity or the trustee of a complying super fund, then a CGT event may occur immediately. Once again, we advise that you speak with Accountant for clarification. This webpage might also be of interest to you and provide some more information – https://www.ato.gov.au/General/Capital-gains-tax/Deceased-estates-and-inheritances/Deceased-estates-and-capital-gains-tax/
Thanks,
BMT team