What is a tax depreciation schedule and how can it change your tax return?
I recently met with Marty Sadlier and Mike Mortlock of MCG Quantity Surveyors www.mcgqs.com.au and asked them the above important question to which they answered here:
Albert Einstein said if you can’t explain something simply, then you don’t understand it well enough. So, it’s time to test my understanding of tax depreciation schedules!
A tax depreciation schedule is simply a report detailing the depreciation entitlements available to you within your investment property. The depreciation entitlements can be broken into two simple categories;
1. Capital Allowances (Division 43)
Capital allowances are based on the historical construction cost of the property, excluding the value of plant and equipment assets, which we’ll come to in a moment. Capital allowances can be claimed on your original residential property, where it was constructed after the 15th of September 1987, or on any subsequent qualifying renovations or improvements completed by either the previous owner or yourself.
So, to put it another way, say your property was built in 1996. We will estimate the cost to build the property at that time, and you’ll be able to claim 2.5% of the value each financial year. So, if the total build cost was $200,000 and the plant items were $30,000, the remaining $170,000 would attract a 2.5% deduction of $4,250 each financial year for 40 years from the date of construction.
2. Plant & Equipment Items (Division 40)
Plant & equipment items are generally ‘loose assets’ or control panels for automated systems as defined by the Australian Taxation Office (ATO). The ATO publishes a list of these assets every year around July. In a residential property, the most common plant assets are;
- Bathroom Accessories
- Exhaust Fans
- Hot Water Systems
- Air conditioners
- Door Closers
- Security Systems
- And many more!
These assets are estimated as part of a depreciation schedule, and you’ll generally be able to claim between 100% and 20% of the estimated residual value each year. Each plant and equipment item has a different depreciation rate, but we’re sticking with an overview here.
Therefore, a tax depreciation schedule includes these two components of depreciation and their estimated value. The schedule itself will show 40 years’ worth of depreciation in two different
accepted methods. One tends to be more aggressive in the first few years (see diminishing value) and the other maintains a more constant level of depreciation (see prime cost).
Now that we know what a depreciation schedule is, how can it change your tax return?
We’re not qualified to provide accountants advice, so you should always speak with them to find out the EXACT impact on your personal situation. Essentially though, the total depreciation comes off your taxable income. Let’s run through a quick scenario.
Let’s say your salary is $88,000 per year, and you have no other deductions. According to the ATO’s simple tax calculator, you’ll be paying $20,507 in tax (2015/2016 year).
We were the first quantity surveyors to publish average deductions in the first full year of claim, this was back in 2015. We’ll be updating our stats soon, but this figure was $9,183 worth of deductions, so let’s assume this figure is available. The $9,183 deduction comes off the taxable income of $88,000 so that brings it down to $78,817. Using the same tax calculator, the tax payable is no $17,162.52.
Breaking that down, a depreciation schedule on this hypothetical, yet average property produced a saving of $3,344.48 within the first full year. An average depreciation schedule is around the $600-$700 mark, so the report is paying for itself five times over within one year.
There are certainly properties that won’t achieve that level of deductions, and some that won’t have anything at all. By the same token, many properties will show over $20,000 worth of deductions within the first year.
The most important thing is to contact a quantity surveyor for an indication of the deductions you might have available to you, as the tax savings can make a huge difference to your investment cashflow and or convert the pain of a trip to the accountant into pure joy!
Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!