Tax depreciation is a deduction against assessable income whereby an investor can reduce the amount of tax payable.
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Such declined value is called the depreciation entitlement.
Tax depreciation is to be added to expense items such as interests, maintenance, rates and fees, etc. to reduce the investor’s assessable income and therefore, reduce the tax payable.
Tax depreciation is a non-cash deduction. Investors don’t actually need pay it from their pocket but enjoy the actual tax benefits arising from tax depreciation every year.
Tax depreciation is a must-have tool for investors to cut down their tax and improve their cash flow effectively.
In Australia, there are two types of tax depreciation:
Capital Works deductions for buildings and structures vary depending on the building type and year built. Please see the chart below.
For example, residential properties built after 18 July 1985 can be claimed at least 2.5% of the original building cost for Capital Works deductions (for buildings and structures). The building cost includes actual costs incurred on the whole construction process, not only the builder’s Contract amount plus all variations, but also the design fee, interest paid, Council’s fee or any cost outside of the builder’s Contract, such as fencing, drive, mailbox, TV aerial, clothes line, floor covering, hard landscaping, etc.
Construction expenditure does not include the value of an owner contribution (i.e., expertise and labour). For example, if the owner chose to paint the building himself, then he can only claim the material part. His own labour or time is ignored by the Law. Furthermore, the cost of acquiring the land and the costs incurred preparing the site for construction are also specifically excluded.
Please note any renovation, extension or alteration completed after 27 February 1992 is also depreciable under a new 40-year cycle regardless of the building’s age.
Plant and equipment allowance (items) has no time limit and can be claimed at any age of the building. However, their depreciable ratio varies depending on the building type. For example, carpet in a commercial building can be depreciated quicker than one in a residential building (even if they are the same). The reason for this is generally, the carpet in a commercial building would wear out quicker.
Plant and equipment allowance takes the majority of the annual depreciable entitlement, particularly on old buildings. They include not only assets fixed to the building structure (such as floor covering, hot water cylinder, appliance, water pumps, window curtains and blinds) but also free-standing assets (such as loose furniture and fit outs) . They are depreciated at an accelerated rate that is in excess of the flat rate utilised in Division 43. Moreover, second-hand plant and equipment are also depreciable.
A Tax Depreciation Schedule is a legal document that shows how much depreciation entitlement the asset owner(s) can have for each year. It covers both Capital Works deductions for buildings and structures (Division 43) and Plant and Equipment allowances (Division 40/42). Since the tax rules change every year, the tax depreciation schedule would vary according to the regulations during the year the assets are acquired.
Once the tax depreciation schedule is made, it can be used for up to 40 years. The cost of getting a Depreciation Schedule is 100% one-off tax deductible immediately.
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There are many ways you can get a tax depreciation schedule. Under the tax law, a quantity surveyor is the only person who can issue a tax depreciation schedule. Anybody else, including accountants, are not allowed to do so.
We recommend the report be completed by a professional quantity surveyor who must also be a registered tax agent (as required by the Tax Law since 2010).
Online or DIY reports lack accountability or accuracy by providing a disclaimer; therefore, they are not recommended. A DIY schedule is also more likely to attract an ATO audit later.
We believe a report from an accredited quantity surveyor who is a registered tax agent can reliably save you thousands of tax money than most of DIY reports.
The result of a tax depreciation schedule is heavily dependent on the schedule writer’s own opinion or judgment. The deviation of such estimating can be as much as 30%.
Once a tax depreciation schedule is made, it can be used up to 40 years. Therefore, it affects the investor’s tax benefits tremendously (by applying its result up to 40 times).
Every investor needs to consider the quality of a final tax depreciation schedule from the start. Can the tax depreciation schedule bring you the maximum tax benefits in the end? Is it covered by high amount of Professional Indemnity Insurance?
We currently redo a lot of tax depreciation schedules because the owner is not satisfied with their schedule maker’s achievement. We want every investor to make the right decision the first time to avoid any unnecessary costs or chaos later on.
The quickest turnaround time we offer is 48 hours (conditions apply). In most cases, our client can get the tax depreciation schedule within 8-15 working days upon the inspection completion.
We provide up to 40 years depreciation calculation and 20 years summary, with 10 years of detailed depreciation tables on each depreciable asset from the settlement date or effective income-producing start date.
We do not believe that “The more years of depreciation provided, the more accurate the result.” During the lifetime of the building, most of the assets need replacing or upgrading. We’d rather provide FREE upgrading services later to maximise the owner’s benefits rather than telling them to apply our initial report for the next 40 years.
It depends on property type, location, furnished or unfurnished, etc. Our fee includes on-site inspection and a million-dollar Professional Indemnity Insurance. All of our fees are tax-deductible.
If you need a firm quote, please fill out our online FREE Quote form, providing all necessary information. We’ll contact you shortly.
9. How much tax depreciation can I get from a tax depreciation schedule?
It depends on the asset type, its age and its condition. For a normal residential property, the first year of tax-deductible amount can vary from $1,000 to $30,000.
Our target is to maximise your tax depreciation entitlements from the day you purchase and we make the schedule as simple as possible (we never provide a computerized tax depreciation schedule that is 34 pages long!).
Our guarantee, Double your fee on Tax savings or our report is FREE.. This is based on our many years professional experience on tax depreciation schedule drafting.
DIY reports are not accepted by professional institutes such as AIQS or RICS. The AIQS has produced guidelines for the preparation of tax depreciation reports by qualified quantity surveyors, which are aimed at ensuring that property owners get a comprehensive and professional report that meets the ATO‘s requirements. Owners who attempt to estimate their own depreciation, or use non-quantity surveying qualified people risk submitting an incomplete or poor depreciation report which could not only cost them in missed deductions but could also possibly attract an audit by the ATO if their report is not up to the standards required.
Because of this, we try to avoid providing DIY reports. It usually lacks accountability and relies on the second-hand information provided by unprofessional people.
Moreover, no DIY report is covered by Professional Indemnity Insurance in Australia, which means the owner needs to take 100% of the risks if it is challenged by ATO audit years later.
We strongly recommend not to bother with a DIY report (though the initial cost might be lower) as it could lead to a disaster on your wealth portfolio.
To do the report, we need the following:
1.1. Owner’s name and settlement date (if owner-occupied before, please also let us know the owner’s move-out date)
1.2. Strata Plan showing area of the unit and carpark
1.3. For furnished dwelling, we need the furniture list including item name, quantity, year bought, cost spent (if you don’t know the cost, just leave it blank)
1.4. For house with renovation or extension before, please provide renovation/extension cost (if you don’t have the cost, just leave it blank)
1.5. To arrange an on-site inspection, we need the contact person name and contact details for access to the property. Normally, the inspection lasts for up to 30 minutes.
Ideally, an application for preparing a tax depreciation schedule should be submitted as soon as the settlement is done or the owner’s move out (change own residence to investment property). This will maximise the allowable deductions and the accuracy of the report is greatly improved.