When preparing a comprehensive tax depreciation schedule, specialist quantity surveyors will use legislation in order to maximise deductions for owners of income producing properties.
There are a number of depreciation methods which can be utilised, such as the immediate write-off rule, low-value pooling and split depreciation reports.
To help owners of income producing residential properties understand these methods, let’s take a look at the rules in further detail.
The immediate write-off rule
In this method, items found in a residential property valued less than $300 can be claimed as an immediate 100 per cent deduction in the year the asset is acquired.
This means that instead of claiming the depreciation of eligible items based on the effective life set by the Australian Taxation Office, the owner can write off the full value of the asset in the year they purchase the asset. This can be completed when they lodge their annual income tax assessment.
Some examples of items which may fall into this category include a smoke alarm which cost $125, a garbage bin which cost $250 or a heat light and exhaust unit which cost $245. As the owner is entitled to claim the full value of these items as an immediate 100 per cent deduction, in total, they could claim $620 for these assets alone.
Using this method, low-cost assets found within a residential property with an opening value of less than $1,000 or low-value assets with a written down value of less than $1,000 remaining after previous depreciation claims can be added to a low-value pool.
Items placed in the low-value pool can be claimed at a rate of 18.75 per cent in the first year and at a rate of 37.5 per cent from the second year onward. This maximises the depreciation deductions an investor can claim in the earlier years of ownership.
Examples of items which may be eligible for pooling include a range hood valued at $700, a cook top valued at $850 and dishwasher valued at $950.
Using the diminishing value method, an investor could claim $449 in total deductions for these items in the first full year. By comparison, when low-value pooling is applied, the total deductions in the first full year will be $468.
In the second financial year, low-value pooling makes an even greater difference. Using the diminishing value method the owner could claim $367 in total in the second year for these three items. By comparison, when low-value pooling is applied the total second year deductions for these three items is $762.
These are just three examples, and the resulting claims could be further increased when all depreciable assets found are included in a depreciation schedule.
It is important to note that assets which form part of a group can cause confusion when it comes to whether or not they can be added to a low-value pool. Blinds and curtains are a prime example. While a set of six blinds may cost around $3,000 in total and it would seem these items don’t qualify, each of these items has an individual value less than $1,000 and therefore can be added to the low-value pool.
Split depreciation reports
When an income producing property has multiple owners, a split depreciation report can be provided.
Co-ownership can impact how the immediate write-off and low-value pooling rules will be applied. This is because these rules can be applied to each owner’s interest in an asset. For example, in a 50:50 ownership scenario, owners can claim an instant write-off for items which are less than $600 in value.
The same method can be used when applying low-value pooling. In a situation where ownership is split 50:50, by calculating an owner’s interest in each asset first, the owners will qualify to pool assets which cost less than $2,000 in total to the low-value pool.
A split depreciation schedule from a specialist quantity surveyor can take into account any numbers of owners and ownership percentages, from two owners at 60:40 to 1:99 or even four owners at 70:15:10:5.
It is recommended that investment property owners always consult with a specialist quantity surveyor to discuss the depreciation benefits they can claim from their property. A depreciation schedule is required to take advantage of the deductions when an investor visits their accountant to complete their annual income tax assessment.