Tax Depreciation FAQs

WHAT IS TAX DEPRECIATION ?

TAX DEPRECIATION OR PROPERTY DEPRECIATION IS A TAX DEDUCTION FOR PROPERTY THAT 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 Tax Depreciation or Tax Deductions claimable 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.

HOW MUCH DOES A DEPRECIATION SCHEDULE COST, AND HOW MUCH WILL I GET BACK?

A tax depreciation schedule is a one off cost, our schedules start from just $390, this fee is 100% tax deductible in the year you pay for it.

The return is where it gets interesting, most residential investors uncover well over $10,000 in deductions in the first full financial year alone, combining both the Capital Works (Division 43) and Plant & Equipment (Division 40) components. Older properties still generate solid deductions, particularly if there have been renovations, extensions or a change of kitchen or bathroom along the way, as those newer works can be depreciated even if the original building can’t be.

To put it in perspective, if your schedule costs $390 and your first year deductions come to $10,000, at a marginal tax rate of 32.5% that’s a refund of around $3,250, meaning the schedule has already paid for itself more than eight times over, in year one alone, and continues delivering deductions for up to 40 years.

The exact amount depends on the property’s age, size, construction quality, purchase price and renovation history, which is exactly why we do a proper site inspection rather than a generic desktop estimate, so give us a call on 1300 884 215 or email at and we can give you a realistic idea of what your property is likely to return before you commit to anything

IF MY 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.

As at Wednesday the 15th of Novemeber 2017, the new Treasury laws amendment ( Housing Tax Integrity ) Bill 2017, owners of second-hand residential properties ( where contracts were exchanged after 7.30pm on the 9th of May 2017 ) will be no longer able to claim depreciation on Plant and Equipment assets, ie carpet, window blinds, ceiling fans etc. However you can still claim the Capital works ( division 43 ) the structural part of the property.

WHAT IF MY HOUSE HAS HAD RENOVATIONS DONE BY THE PREVIOUS OWNERS BUT I DONT KNOW THE COSTS ? CAN I CLAIM ?

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 $60,000 extra in depreciable items and was very happy.

WHAT CAN I CLAIM IN MY CONSTRUCTION EXPENDITURE FOR A NEW INVESTMENT PROPERTY ?

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, Tony signs a contract for $300,000 to build and upon completion Mary rents out the house; Mary can deduct almost all of the construction expenditure with the exclusion of the soft landscaping such as turf or plants, in Marys situation once we deduct those costs she can claim $295,000. We can not include the land costs.

Now if Tony was to build the same house on a block of land that he owns and decides to rent it out himself then he has to use the true cost to himself, ie he would have built it for $250,000 and would have normally charged someone else the $300,000 contract. Tony cant include his own labour or profit margin. 

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 A QUANTITY SURVEYOR ACTUALLY DO TO PREPARE A DEPRECIATION SCHEDULE?

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 TAX DEPRECIATION REPORT?

You will receive a 7 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 30 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 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 depreciable and must be deducted from the total costs.

CAN I DEDUCT OR DEPRECIATE 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 below.

CAN YOU DEPRECIATE SWIMMING POOL EQUIPMENT SUCH AS PUMPS, HEATERS AND POOL CLEANERS ?

Yes, the plant and equipment that comes with a swimming pool can be individually depreciated and separated out from the capital works. For example the pool filtration equipment will have an effective lifespan of 12 years as opposed to the pool cleaning equipment that has a 7 year life span.

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.

CAN I CLAIM MY BATHROOM AND KITCHEN RENOVATION AS A TAX DEDUCTION?

Yes, bathroom  and kitchen renovations are Tax Deductible, they will need to be split into capital works and the plant & equipment , the majority of the works will be capital works which will have to be spread over 40 years. Typical capital works for a bathroom are items such as carpentry work, electrical, plumbing, painting, tiling etc. plant & equipment for a bathroom will normally be items such as exhaust fans, spa pumps and heated towel rails . A typical small bathroom renovation of $10,000.00 will give you an extra $250.00 depreciation per year for capital works and the plant and equipment if under $300.00 will get an immediate deduction.

IS MY TAX DEPRECIATION REPORT TAX DEDUCTIBLE?

Yes our fee is fully tax deductible, if you engage any professional to manage your tax responsibilities such as a tax depreciation schedule, accountants fees, etc, then the fee is 100 % deductible in that financial year . This refers to the income tax assessment act 1997, section 25-5 .

IF I HAVE HAD MY PROPERTY FOR A FEW YEARS AND NEVER CLAIMED DEPRECIATION, CAN I CLAIM THE PREVIOUS YEARS ?

No, you will have to make an amendment to your personal tax return to the years that you missed. You can normally back date the last two financial years. See the question below, the date you can amend from is the notice of assessment date, so for example if you lodge your 2013 return late in July 2015, then your 2013 can be amended up to July 2017

IS THERE A LIMIT ON MY PERSONAL INCOME TAX ADJUSTMENT ? ( From the ATO website )

The law sets time limits for amending your tax assessment.

For individuals and small businesses the time limit is generally two years, and for other taxpayers four years, from the day after we give you the notice of assessment for the year in question (generally taken to be the date on the notice or, if we don’t issue a notice, the date the relevant return was lodged).

For example, you’re a sole trader and receive a notice of assessment dated 12 November 2015. Your two-year amendment period starts on 13 November 2015 (the day after the date on the notice) and ends two years later, on 12 November 2017, so you have until that day to lodge a request for an amendment to that assessment.

You can submit more than one amendment request within an amendment period.

The time limit gives you certainty about your tax affairs because it means we can’t amend your tax assessment after the time limit has passed (except in some exceptional situations such as evasion or fraud).

If you want to change a tax return after the time limit has passed, you may be able to lodge an objection. While the time limit for lodging amendments and objections is the same, you can request an extension of time to lodge an objection in some circumstances.