According to recent statistics released by the Australian Taxation Office (ATO), Australian investors claimed $2,139,156,047 in capital works deductions (division 43) and $2,028,038,155 in plant and equipment depreciation (division 40) for the 2011 to 2012 financial year.
Despite the substantial claims investors made last year, a large number of investors are still failing to claim all of the depreciation entitlements available to them.
It’s no surprise this is the case, property depreciation can be a complex topic and many investors remain unaware of the different types of deductions available to them. Research shows that 80 per cent of investors miss out on thousands of dollars in deductions simply because they either don’t claim depreciation at all or fail to ensure their deductions are maximised.
To help explain some of the rules surrounding depreciation, here are some of the key definitions and facts about depreciation for investors as they prepare to visit their accountant to complete their annual income tax return.
What is property depreciation?
As a building gets older, the structure and the assets contained within the property wear out – they depreciate in value. The ATO allows property owners to claim this as a deduction. A property must be income producing in order for the owner to qualify to claim depreciation.
Capital Works Depreciation (Division 43)
Division 43 represents the deductions available for the structure of the buildings and the items within a building deemed to be irremovable. Examples include bricks, mortar, walls, flooring and wiring. The ATO allows investors to claim capital works deductions at a rate of 2.5 per cent over 40 years. However, not all properties qualify. An investor's eligibility to claim capital works deductions depends on the property type and the construction commencement date.
Residential investment property owners can claim capital works deductions if the property commenced construction prior to July 18, 1985. For commercial buildings, the legislated date is July 20, 1982. However, this does not always mean that the owners of older properties are unable to claim capital works at all. If a property was constructed prior to these dates and a renovation has been carried out after the qualifying dates, the owner will still qualify to claim capital works deductions for the renovations, even if they were completed by a previous owner.
Plant and Equipment Depreciation (Division 40)
Division 40 represents the depreciation deductions available for plant and equipment assets contained within a property. Plant and equipment items are mechanical and removable fixtures and fittings. Examples include carpets, free-standing lights and light shades, furnishings and hot water systems as well as less obvious items such as garbage bins, mechanical exhausts and door closers.
Plant and equipment assets depreciate at a faster rate than structural items. The ATO provides an effective life for each individual asset. These assets are often updated and replaced over time, so regardless of a property's age, there will always be deductions available for every investment property owner.
The images below show examples of how structural items and assets are categorised.
Many property investors miss out on depreciation deductions because they self-assess or estimate the costs in their investment property based on their own judgement.
To ensure deductions are claimed correctly, an investor should consult with a specialist quantity surveyor and ask them to arrange a tax depreciation schedule. A quantity surveyor will perform an inspection of the property to identify the assets contained in the property. All of the deductions for both division 43 and division 40 will then be outlined in the depreciation schedule for the investor's accountant to make the claim on their behalf.