Understanding tax depreciation lingo can sometimes be confusing but as an investor, it’s important that you have a good understanding of depreciation to ensure you’re getting the most out of your investment property.
In its simplest form, depreciation is a tax deduction for the wear and tear incurred on your income-producing property and its assets. Unlike other expenses involved in holding an investment property, such as repairs and maintenance, no money needs to be spent in order for an investor to be eligible to claim depreciation. For this reason, it is often described as a non-cash deduction.
There are two categories that make up depreciation deductions, as outlined by the Australian Taxation Office. These are division 43 capital works deductions and division 40 plant and equipment depreciation.
Capital works deductions, also known as building write-off, are deductions that an investor can claim for the wear and tear that occurs to the structure of the property and items considered to be permanently fixed to the property. This includes any structural improvements that may have been made during a renovation.
In a residential property, capital works deductions cover the following items:
- Bricks, mortar, walls, flooring and wiring
- Built-in kitchen cupboards
- Clothes lines
- Doors and door furniture (handles, locks etc.)
- Fences and retaining walls
- Sinks, basins, baths and toilet bowls
Particular assets can cause confusion because some parts will qualify for plant and equipment depreciation while other parts qualify for capital works deductions. An example of this is an air conditioning unit, where the unit itself depreciates under division 40 whilst the ducting for the same unit falls under division 43.
Similarly, an in-ground pool falls under the division 43 whilst the pumps and filtration equipment for the pool are division 40, depreciating plant and equipment assets.
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.
If your property was constructed prior to 1987, it is still important to get in touch with a qualified Quantity Surveyor as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner.