Let’s face it, tax time can be a drag. But for savvy Aussie property investors, it’s an opportunity to chalk up savings with the help of a depreciation schedule. Think of it as your secret weapon for reducing your taxable income.
What is a depreciation schedule and how does it work?
Imagine your stylish you home with all its mod cons. A depreciation schedule acknowledges that these features – from the stainless-steel appliances to the plush carpets – will naturally wear over time. The Australian Tax Office (ATO) allows you to claim this gradual decline in value as a tax deduction, effectively spreading the cost of the asset out over a set number of years.
But wait, there’s more! While depreciation is most valuable for brand new buildings, established bricks-and-mortar classics qualify too. So, whether your property is an off-the-plan apartment, greenfield development, or a charming beach house with slightly temperamental plumbing, all those features and quirks contribute to its character (and your tax deductions!).
The Power of Depreciation: Numbers Don’t Lie
The amount you can save with depreciation depends on a few factors, but here’s the exciting part: it can be significant. If you’re in a high tax bracket, you could be looking at reductions in your taxable income by thousands of dollars each year.
For brand new builds, this depreciation could be as much as $90,000 over 5 years, reducing your taxable income at your marginal tax rate. For high income earners, this could result in tax reductions of up to $40,500 over those 5 years. That’s real money you can reinvest in your property or, gasp, use to pay off your mortgage faster.
The ATO: Your Depreciation Partner
The Australian Taxation Office (ATO) website serves as a valuable resource for all things depreciation. They offer a user-friendly depreciation rates lookup tool and comprehensive information on calculating depreciation deductions and the effective life of assets. This information includes details on prescribed rates, self-assessment, and the ATO’s annual determinations for asset effective lives. The data is regularly updated, but rental property information can be found here.
Two Paths to Depreciation Deductions
There are two main methods for calculating depreciation on your investment property:
- Prime Cost Method: This assumes the asset depreciates at a steady rate over its effective life. The ATO website provides a handy formula to calculate this, which factors in the asset’s cost, the number of days you owned it in the income year, and its effective life.
- Diminishing Value Method: This method acknowledges that assets depreciate faster in their early years. The ATO also provides a formula for this method, which takes into account the base value of the asset, the number of days you owned it, and a multiplier based on the effective life.
Capital Works vs Plant and Equipment
Australian tax law allows deductions for two categories of depreciable assets in investment properties:
- Capital Works: This covers the building structure itself, including walls, roof, plumbing, and permanent fixtures. The ATO allows a deduction of 2.5% of the construction cost (excluding GST) each year for 40 years, provided the property was built after September 15th, 1987.
- Plant and Equipment: This refers to removable items like appliances, blinds, carpets, and hot water systems. Each item has its own “effective life” determined by the ATO, which dictates how long you can claim depreciation on it.
Don’t Go It Alone: Unlock the Full Potential of Depreciation Schedules
While the ATO website offers valuable resources, getting a professional involved can maximize your depreciation deductions. An expect can inspect your property and create a comprehensive depreciation schedule, ensuring you claim everything you’re entitled to. This report will detail the capital works value, the effective life of each fixture and fitting, and the respective depreciation deductions.
Remember: Depreciation schedules are a powerful tool for any property investor. With a little planning and some help from the ATO and qualified professionals, you can significantly reduce your tax burden and boost your overall investment returns. So, grab a cuppa, do your research, and get ready to transform tax time from a chore into a celebration of your financial savvy!
OneCorp works with trusted partners to supply our clients with expert support at every stage of the property investment cycle. When you work with us, you get access to a range of professional including Financial Planners, Mortgage Brokers, Building Management, and we can coordinate your depreciation schedule as well. Leave the details to us; you’re in safe hands.
