What do we look at when calculating tax depreciation?

Written on the 26 April 2018 by Gillian

Clarifying Tax Depreciation

Tax depreciation can seem a little vague for many people as you try to work out how it all works.

We talked about this in one of last months blog posts

'Why a tax depreciation report should be renamed as a Chocolate Sundae with a cherry on top.'

This time, I wanted to go a little further and explain what our Quantity Surveyor will actually look at when they come out to assess your property.

In essence, the ATO allows us to claim depreciation on certain parts of our investment property (although the latest news mumblings from the government have been making everyone in the property sector very cranky). Have a read of this news article to get a quick update.

The ATO allows us to claim depreciation on our investment properties.

Anyway, political dramas aside, there are two parts to depreciation that we look at:

Capital Works and
Plant & Equipment
Let's go through each one so hopefully, you can get an idea of what we look at.

Capital Works Deduction

The Capital Works deductions are the parts of your property that are structural that can't really be taken out of the property.

Things like the walls, windows, concrete floors and the roof are examples of structural things we look at for Capital Works.

The thing that you need to know about the Capital Works Deduction is that you can only claim this on properties that were built after 15 September 1987 or for renovations completed after this date.

You can only claim Capital Works Deductions on properties built after 15 September 1987
That's right, if you replaced your roof in a post-1987 property, then you can claim depreciation on it.

This is a popular deduction for anyone that has completed renovations. Because the good news is that most of your renovations will be able to be included for depreciation and tax purposes.

One thing you may not know is that you can actually claim depreciation on renovations done by previous owners! That's so great I am going to say it again.

You can claim depreciation on renovations done by previous owners

You don't need to worry about trying to chase down how much those renovations cost. Part of our job is to see the renovations and put a number to how much the renovations would have cost.

So the other part of tax depreciation is the Plant & Equipment Deduction.

Plant & Equipment Deduction

The Plant & Equipment Deduction covers the parts of the property that can be removed and generally makes up the largest part of your depreciation schedule.

Things like:

Carpets
Air-Conditioning Units
Blinds
Ovens, Cooktops & Range Hoods
Dishwashers
Ceiling Fans
Smoke Alarms
Remote Door Controllers and motors
Furniture that is part of the lease.and more
We have seen some great tax depreciation returns on fully furnished units where all of the furniture can be included in your depreciation schedule.

Next, I want to talk to you about another part of depreciation that usually applies to units and commercial properties called, 'Common Property'.

Common Property

Common Property is the areas in a property that you jointly share with others.

So when we come and visit you to inspect your property for depreciation

We've checked out the 'Capital Works' remember these are the walls and things that can't be moved
We've checked out the 'Plant & Equipment' in the property these were the 'movable' things that belong to the property (think about anything that might be stolen if someone were to break in)
Now if you are in a unit, we want to check out the 'Common Property' as part of the above 2 things.
When you buy a unit, there are areas of the unit that you jointly own with others in the complex. Common Property is the areas that everyone in the complex can use.

You are allowed to claim depreciation on a portion of 'Common Property' areas as well.

So how do we work out what can be included for depreciation from the Common Property?

When you buy a property that has 'Common Property' included, you will be given a document called a 'Strata Entitlement Schedule' that gives you a ratio.

The ratio is usually used to work out how much electricity, water etc you are responsible for paying.

Every property does this differently so it may not be as simple as 'I own 1 out of 10 units so I pay 10%'.

Here's an article if you want to read more about how strata entitlement is worked out, but I warn you, it can get complex!

So your Strata Entitlement Schedule will have the number that we use to work out how much of the Common Property you can include in your depreciation schedule.

Common Property includes things like:

Lifts
Swimming Pools
Gym Equipment
Saunas
Security Systems
Fire Alarms
Watering Systems and more
The rule says that if it dies you can't claim it. So plants and gardens are out!

If it dies, you can't claim it
gold coast quantity surveyor
Lawns/turf can't be depreciated because it can die

So when we return your tax depreciation report to you and you are wondering why some things were included and others were not, hopefully, this article will help you to work out why.

Don't hesitate ever to just pick up the phone and have a chat with us. The more questions you ask, the more you will learn and the better property investor you will become!

Click here to contact us if you feel like you have some more questions.