What is property Tax Depreciation?

If the property is being used to generate an investment income, the Australian Taxation Office (ATO) allows the property owner to claim back the decline in building value by way of a Tax Deduction.

The amount of the deduction varies depending upon the date of the original building construction but is either 2.5% or 4% of the Capital Works component of the building cost. In addition to this flat rate the ATO recognises that a number of building components (plant and equipment) have a shorter life than say bricks and mortar. Appliances, carpet, air-conditioning, blinds, smoke detectors are just a number of the ‘wear and tear’ items that have a shorter effective life than the main building structure and as such are granted an accelerated rate of depreciation.

When we have worked out the amount of depreciation available you can offset this against your income, ie you make $15,000 income on your investment property during the year and the claimable depreciation is $10,000, the depreciation is treated as a non cash expense that you can offset against the income, reducing the tax payable for that year.

If my residential house is old, can I claim depreciation?

If the house was built after the 18th of July 1985 then you can claim depreciation on the original construction, however most houses have had renovations or additions added to them over the years. If the structural improvements were done after the 27 of February 1992 then we can also include these.

A typical example of this might be an old Queenslander house built in the early 1900’s, the house may have been restumped, lifted up, had a new roof put on or a new kitchen and bathroom installed. If these improvements were done after the 27 th of February 1992 then they are depreciable.

One house had more than $150,000 of work done in the last 10 years and even though the original house was no longer able to be depreciated the new renovations were.

What if my house has had renovations but I don’t know the costs?

It is quite common that some people know of recent renovations to the house by previous owners or they have done the renovations themselves but didn’t keep track of the costs. If the tax payer is completely unable to obtain information about the actual cost of capital works then a building cost estimate by a Quantity Surveyor or other independent qualified person may be used. However, Valuers, Real estate agents, Accountants and Solicitors are not normally considered to be appropriately qualified.

An example of this was by a new owner who just purchased an older property but had known that the previous owner had installed a new kitchen and bathroom. The owner didn’t know how much it cost so employed our services, when we did our inspection we looked at the renovations, measured them and then worked out the appropriate construction cost, the client gained more than $20,000 extra in depreciable items and was very happy.

What can I claim in my construction expenditure? ( A deduction under Division 43 )

You have just done some major renovations or built a house, it’s important to know that not all of those costs can be claimed as capital works, construction expenditure includes preliminary expenses such as Architect fees, Engineering fees, Surveying fees, building fees, building approvals and the cost of foundation excavations (Taxation ruling TR97/25) plus the actual construction of the structural features.

What you can’t claim on is the cost of acquiring land, demolishing existing structures, the cost of preparing a construction site ( eg clearing, levelling, filling or draining ) before carrying out excavation works, the cost of landscaping, ie plants , trees, soil etc, but you can claim on hard costs such as retaining walls or paths etc.

What makes this more confusing is if you are an owner / builder or you bought a house from a speculative builder.

E.g. Tony is a builder and he constructs a house for Mary on her own land, it costs Tony $95,000 to build but he sells it to Mary for $110,000. Mary upon completion lets the house; Mary can deduct an amount under Division 43 based on the construction cost of $110,000, which was the cost to her of constructing the building.

Now if Tony was to build the house on a block of land as a speculative builder and sell it to another party; say, David then the costs that David can deduct as the new owner is the actual cost of $95,000

That’s because specifically excluded from construction expenditure are the value of the builders own contributions to the construction process and any profit element on the sales transaction.

Also if you are an owner builder then any of your contribution to capital works (such as labour and expertise) and any notational profit are not included in construction expenditure.

What does the Quantity Surveyor actually do?

When the inspector visits the site, he will initially measure up the house, driveways, fencing and take note of any recent renovations throughout the house, he will note down all the separate plant & equipment, model numbers, ages etc, he will take particular care to make sure all the depreciable item in the houses are allowed for. The inspection will normally last 30 -45 mins, when finished the
report will then be written up. As part of the ATO tax guide the Quantity Surveyor will separate out the Plant & Equipment (Division 40) from the Capital works (Division 43)

Plant & Equipment are items such as carpet, blinds, ovens etc while Capital works are the structure part of the building ie, foundations, walls, roof etc. Once this has been done the Quantity Surveyor will apportion a cost to the asset or capital works, ie a 5 year old oven may be allocated $400 while a brand new oven may be $1000. The QS will use his understanding of market rates for depreciable items with the construction costs for the Capital works, based on industry standard rates. Once the remaining eligible building construction costs have been worked out, the Quantity Surveyor will check the sales data for the particular property to make sure that the answer he has got matches what previous sales data is telling him and then he will finish the report.

What do I get in my Report?

You will receive a 6 page report that gives a detailed 10 year analysis of all the depreciable items and Division 43 Capital works (which is the remaining eligible building cost). We also summarise this over a 20 year period and present it to you in the diminishing and prime cost (straight line) methods.

Don’t be fooled by other companies that claim to give you a detailed 20 page report, all the information your accountant needs, in most cases is on 2 pages. Some reports are so hard to read and understand that it impossible to figure out where the figures came from.

Our reports are detailed enough for you to see our calculations but also easy enough for you to see straight away what you can claim back in the corresponding years. We like to provide enough detail so that, if there are any questions by yourself or your accountant the information is clearly shown to answer your questions. We also include immediate 100 % write offs for depreciating assets costing $300 or less and low value pooling of items under $1000.

Can I claim back depreciation on my new Kitchen?

Yes you can, however the bulk of the Kitchen will fall under Division 43, Capital works and will be depreciated over a 40 year effective life or 2.5% per year. Most new Kitchens would have had new Ovens, Cooktops, Rangehoods etc installed and these are classed as Division 40, Plant & Equipment and will a shorter effective life averaging around 12 years or 8.3% per year.

Can I claim depreciation on landscaping?

Yes and No, hard landscaping such as fencing, paths, driveways, retaining walls etc will be depreciated over a 40 year period however soft items such as trees, plants, turf, soil are not depreaciable and must be deducted from the total costs.

Can I deduct my swimming pool?

Yes you can, It will come under Capital works, Division 43 and will be depreciated over 40 years, Plant and Equipment items associated with the pool such as pool filters, pool heaters, cleaning equipment will be depreciated at a much faster rate, see our typical deductions list for specific items.

Can you depreciate a swimming pool heater and pump?

Yes, this will come under plant & equipment, download our free plant & equipment deduction list for the full range of depreciable items.

Is a Garage door depreciable?

Yes, the door itself will fall under Capital works and depreciate at 2.5 % per year, however the garage door motor and remote controls are classed as Plant & Equipment and will diminish in value at a much faster rate. The Garage motor at 10 % per year for 10 years and the remotes at 20 % per year for 5 Years.