When a building gets older and items within it wear out, they depreciate in value. The Australian Taxation Office (ATO) governs legislation that allows owners of any income producing property to claim a tax deduction for this wear and tear.

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

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

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

BMT Capital Allowance and Tax Depreciation Schedule

Capital works deductions(division 43)

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

Plant and equipment assets(division 40)

Effective life determines depreciation rate

Capital works deductions or building write-off refers to the tax deduction for the building’s structure and items considered to be permanently fixed to the property. The ATO recognises that your property will deteriorate and likely need repairs and maintenance work done, for you to continue to produce a taxable income.

Residential property

In a residential property built after 15th September 1987, capital works deductions are available to be claimed at 2.5% for the ATO specified life of the property which is 40 years. This includes items such as the foundation, walls, roof and items which are considered fixed to the building such as doors, windows, kitchen cupboards, toilet, sinks and tiles.

Business / Commercial property

For any properties used for business purposes (such as offices, warehouses, shopping centres, restaurants, cafés, etc) capital works deductions vary based on the type, age and the property’s historical construction cost.

The below table explains which rate is available for different properties, based on their industry and construction commencement date:

Chart

Capital works deductions remain unaffected by the current legislation introduced on 9th May 2017 and can continue to be claimed for all properties.

 

Here are a few examples of typical depreciable items you could claim under a capital works deduction.

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
  • Building
  • Roof
  • Car parks
  • Ducted air-conditioning units
  • Sinks, basins and toilet bowls.

Capital works deductions typically make up between 85 – 90% of the total claim.

Plant and equipment assets are items which are considered by the ATO to be easily removable from the property or mechanical in nature.

Plant and equipment assets are identified through ATO legislation as assets which have a limited effective life and can reasonably be expected to decline in value or depreciate over the time they’re used. Plant and equipment depreciation rates are calculated based on their effective life which is set by the tax commissioner and updated regularly through tax rulings.

The depreciation rates and effective lives of all ATO specified plant and equipment assets differ by asset and even by industry. The ATO recognises that plant and equipment items will wear out more quickly than the building itself and likely need replacing sooner.

 

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 fittings
  • Swimming pool filtration and cleaning systems
  • Security systems

Commercial Property:

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

Under current legislation, owners of second-hand residential properties which exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. Owners can claim for any new plant or equipment assets added to the property such as an oven or dishwasher.

The legislation provides opportunities for investors in the following scenarios as it does not impact them:

Green tick Brand-new residential property

Green tick Investors who add new plant and equipment assets to their property after purchase and directly incur the expense

Green tick Investors who purchase properties which are considered to have been substantially renovated by the previous owner

Green tick Any residential property held in a superannuation plan (other than Self-Managed Super Funds SMSFs)

Green tick Investors who hold residential property in corporate tax entities, including company entities

Green tick Home owners who turned their primary place of residence into a rental property prior to the 1st of July 2017

All non-residential and commercial properties are also eligible to claim all plant and equipment assets.

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

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 capital allowances and tax depreciation report or schedule. When completed, a tax depreciation schedule outlines the deductions available for both capital works and plant and equipment assets and is used each financial year when preparing tax returns.

Property investor case studies