Tax depreciation is...

As a building gets older and items within it wear out, they depreciate in value. The Australian Tax Office (ATO) allows owners of income producing property to claim a tax deduction called depreciation, on a building's structure and plant and equipment assets contained within it.

Depreciation for income producing properties defined by the ATO is claimable under two major components: Capital works allowances  (division 43) and Plant and equipment (division 40).

Tax depreciation helps investment property owners claim more

Claiming depreciation is a significant taxation benefit, and one which many investment property owners are unaware of. Depreciation is a non-cash deduction – you do not need to spend any money to claim it.

See below for typical depreciation deductions found for different property types.

House purchase price:
$600,000
Unit/Apartment purchase price:
$400,000
Retail shop purchase price:
$875,000
Commercial building purchase price:
$1,100,000

What is deductible under capital works allowance?

Capital works allowance or building write-off refers to the tax deduction for the building's structure and items considered to be permanently fixed to the property. In a residential property, capital works deductions are available to be claimed at 2.5% for the ATO specified life of the property – 40 years. For commercial and other types of non-residential properties, capital works deductions can be claimed either at 2.5% or 4% of the property's historical construction cost depending on the age and type.    

 

Here are a few examples of the depreciable items you may be able to claim under a capital works allowance for both residential and commercial properties:

Residential Property:

  • Built-in kitchen cupboards
  • Clothes lines
  • Doors and door furniture (handles, locks etc.)
  • Driveways
  • Fences and retaining walls
  • Sinks, basins, baths and toilet bowls.

Commercial Property:

  • Bricks
  • Mortar
  • Roof
  • Car parks
  • Concrete
  • Sinks, basins and toilet bowls.

What is plant and equipment?

Plant and equipment assets are items which are considered by the ATO to be easily removable from the property. The depreciation rates and effective lives of all ATO specified plant and equipment assets differ by asset and even by industry.

 

Examples of items that can be depreciated as plant and equipment include:

Residential Property:

  • Hot water systems, heaters, solar panels
  • Air-conditioning units
  • Blinds and curtains
  • Light shades
  • Swimming pool filtration and cleaning systems
  • Security systems.

Commercial Property:

  • Carpet and flooring
  • Desks
  • Blinds
  • Shelving
  • Manufacturing equipment
  • Commercial ovens.

Research by BMT Tax Depreciation shows that between 15 - 35% of the construction cost of a residential building is made up of plant and equipment assets. Maximising plant and equipment deductions is one of the keys to ensuring increased depreciation claims for a property owner.

How do property investors claim depreciation?

In order to claim depreciation deductions property investors generally need to enlist a specialist Quantity Surveyor to complete a comprehensive tax depreciation schedule. The schedule outlines the deductions available on an income producing property and is used each financial year when preparing tax returns.

A BMT Capital Allowance and Tax Depreciation Schedule includes a detailed outline of two major components:

Plant and equipment assets (division 40): Includes assets which can be easily removed from the property. The asset’s condition, quality and effective life all determine the allowances available.

Capital works deduction (division 43): Is the deduction for the building’s structure. Available on properties constructed post 1982 (non residential) and 1987 (residential).

 

Capital works deduction (division 43)

division 43

Available on properties constructed post 1982 (non-residential) and 1987 (residential)

Plant & equipment assets (division 40)

division 40

Effective life determines allowance available