How a Depreciation Schedule Reduces Your Tax Obligation
Depreciation can assist in lowering the net profit of an investment property. As it's the taxable income that is used to determine how much tax is owed by property investors, by lowering the profit, you can lower the amount of tax owed.
How it works is that a quantity surveyor will create a tax depreciation schedule, which is used to determine the amount of depreciation that can be claimed. The depreciation that may be claimed for the building, plant and equipment is described in detail and summarised in this depreciation schedule.
An accountant simply refers to these depreciation values as deductible charges under the applicable sections, Division 43 Capital Works or Division 40 Depreciating Assets. This process is wrapped up into the standard procedure of property investors preparing tax statements at the end of the financial year.
The net profit declared in the tax submission will be lower, which in turn lowers the real estate investor's tax obligation.
A tax depreciation schedule frequently shows tax deductions going back up to 40 years. It is a one-time expenditure that, in some cases, may be used for years or even decades.
Eligibility to Make a Claim on Tax Depreciation
A property owner may claim depreciation deductions for any capital works (Division 43 works) that they have paid for.
These works frequently incorporate both the original building, as well as renovation projects such as the expansion or remodelling of a room like a bathroom, kitchen, or outdoor area.
If it is specified in the lease agreement, a landowner may also be able to claim the tax depreciation of any Division 40 assets (plant and equipment) that they have acquired.
In some cases, if the business tenants of a commercial investment property paid for interior fit-outs, they may also be able to claim property depreciation.
This might include claims for furniture, carpeting, refrigerators, tables and seating, machinery, and electrical or hot water systems that they own as a part of their business.
How Much Tax Depreciation Will You Be Entitled To?
The ultimate rate of depreciation for the building and assets will be determined by the qualifying period, the building's effective lifetime, and other variables.
Different formulas are available to calculate tax depreciation. Which formula is used to determine property depreciation depends on the kind of structure it is.
Capital Depreciation
Division 43 is the term used to describe a property's structure. This includes all equipment and materials required for building as well as enduring fixtures like sinks and worktops.
The prime cost method is used to determine the rate of tax depreciation for Division 43 assets. This method is predicated on the notion that an asset's loss of value would be constant over the course of its useful life.
In order to precisely calculate the building expenses of a specific commercial facility, a quantity surveyor will be required. This is because estimated construction costs are used to calculate tax depreciation – not the purchase price of the property.
Plant & Equipment Depreciation
Either the Prime Cost approach or the Diminishing Value method can be used to determine the tax depreciation of machinery and equipment.
Each asset covered by this section, including niche assets that are specific to a given industry, has an effective lifespan set by the ATO. The ATO has released a comprehensive list of the nominated effective lifespans for assets across various industries, known as TR 2018/4.
Assets used in commercial properties have a different effective lifespan than those in residential properties. This makes sense, as the furnishings of a hotel room or medical facility will experience more wear and tear, and therefore deteriorate more quickly, than those in a residential house.
Turn to Quantity Surveyors for a Depreciation Schedule
To maximise your tax deductions, it pays to turn to certified quantity surveyors. Quantity surveyors are experts in determining how much an investment property has depreciated. They will be able to apply the necessary rates to the investment property's tax depreciation schedule, to maximise your depreciation deductions.
Quantity surveyors may even be able to revise the value of a particular asset. This could be at the point of purchase of a property, if the values are not noted in the contract of sale, or if they assign new effective lifespan based on their expert judgement.
Why Are Tax Depreciation Schedules Necessary?
To determine the historical construction cost of the building and estimate the remaining effective life of assets, you will need a tax depreciation schedule.
Tax depreciation schedules must be created by quantity surveyors, as tax depreciation is calculated based on the construction costs of the building rather than its purchase price or valuation.
Instead of relying on tax depreciation schedules from an accountant that might not hold up to an ATO audit, you should speak with quantity surveyors. The ATO does not consider accountants to be qualified to estimate construction expenditures.