Frequently asked questions about tax depreciation
A tax depreciation report is a document that schedules out the value of all the depreciable items within and around your investment property. (This includes common items in strata titled complexes.)
The ATO allows investment property owners to claim for the wear and tear on these items each financial year. This can create significant reductions to your income tax, resulting in handy cash flow for you.
Depreciable items are broken into two categories:
1. Capital items, which are “fixed items” including:
- The building and other structures on the lot
These items are generally depreciable at 2.5% per annum for the life of the item (40 years).
2. Plant and equipment, which are “loose” items, including:
- Kitchen appliances
- Floor coverings
- Window dressings
Each of these items has a life set by the ATO and fall into one of three categories:
- Items less than $300 in value and claimable at 100%
- Items between $301–$1000 and claimable at 37.5%
- Items greater than $1000 and claimable at a specific percentage each year, set by them
Your report is broken into two main ATO-approved categories, corresponding to the two types of depreciable items: Div. 40 and Div. 43. From there, we break it down into further items:
Division 40 (Plant & Equipment Deductions) includes any items that are reasonably easy to remove, such as:
- Cutlery & crockery
- Hot water units
- Solar panels
- Wheelie bins
The ATO, in their wisdom, assigned different effective lives to many Division 40 items. Those of low value (<$300) can be written off at 100% in the first year. Other very expensive, long-life items can go right down to 3.33% p.a., giving them an effective life of 60 years. Don’t worry too much about this; we have the ATO rulebook on hand.
Division 43 (Capital Works Deductions) includes anything that can’t easily be removed and is newer than September 1987, such as:
- The building
- Renovations & extensions
- Retaining walls
- Tennis courts
Division 43 items are generally depreciated at 2.5% p.a. for 40 years to reach 100% depreciation.
It’s not a market valuation. Its purpose isn’t to work out the resale value of the property. Rather, it is to create an itemised breakdown of build costs—both original, and newer works. Lots of investment property related costs don’t need to go into the tax depreciation report; here’s a brief list:
- Agent fees
- Land tax
- Legal fees
- Accounting fees
Your accountant will handle those items directly. What they can’t do is calculate the tangible assets of your property. That’s called estimating, and is the core of Quantity Surveying. It includes items like:
- The building
- The landscaping
All these things need to be estimated by the QS to set a baseline for your tax deductions. The ATO specifically mentions that accountants are not qualified to prepare a depreciation report like this.
Note: If you have just converted your principal property to a rental, then you will need a market valuation as well, in order for the ATO to calculate any future Capital Gains Tax. I can do this for a fee, but the ATO is happy with a real estate agent appraisal—and that’s a free service. You want the valuation to be as high as possible (within reason), so get a few and pick the best.
Under TR97/25 the ATO says: “investors must engage a Quantity Surveyor to produce a depreciation schedule on their behalf.” This is because the possibility of rogue operators overvaluing items led the ATO to make quantity surveyors registered tax agents with the Tax Practitioners Board (TPB). In doing so, all TPB-registered quantity surveyors are bound by the TPB and ATO legislation. Therefore, we must not provide false or misleading information on the depreciation report.
Our report calculations run for 40 financial years from the first rented date. Your accountant will mark off the depreciation as a loss against your rental income. What this means for you is simply less tax payable.
Should the deductions be greater than the income, your accountant will mark off these losses against other income sources (usually your job). This is known as Negative Gearing. Once again, what this means for you is less tax payable.
How to get a tax depreciation report
- Get a no-obligation free assessment of your property to see if it’s worth it
- I’ll send you a quote + sample report + a guaranteed minimum per annum deduction amount
- You supply some basic information about the property
- One of our Quantity Surveyors will inspect your property
- We prepare the report and send a copy to you and your accountant.
Get your free sample report & quote
Easy 30-sec form, quick reply, no obligation
Remember: if you do get a report, for every $1 you spend, you will get at least $18 back from the ATO (spread over 7 years).
Tell us about your property and we’ll arrange those quotes
Prefer to arrange your quotes over the phone? Give us a call and we’ll do it all for you: 0422 401–509.