Tax Depreciation Air Conditioners

Updated: January 2024

Depreciation of Air Conditioners in Rental Property

Yet many investors – especially first time owners – don’t know that air conditioner could mean they’re entitled to significant tax deductions through a tax depreciation schedule.

Let me explain:

The ATO allows property investors to claim the wear and tear of assets within – and on – their investment as a yearly tax deduction.
To do this the items/assets must be assessed by a qualified quantity surveyor and entered into a tax depreciation schedule.

These Tax Depreciation deductions are split into two main categories.

• Capital Works
• Plant and Equipment

The Depreciation on air conditioning actually often falls into both categories at the same time.

Plant and equipment:Tax Depreciation for Division 40 Items

The bulk of air conditioners qualify as plant and equipment.
This includes wall and window mounted room air conditioners, Split and reverse cycle air conditioners – even ducted systems.

Under current ATO legislation these units can be deducted at 10% pa in the Prime Cost method or double that, (20% pa) in the Diminishing value method.
This assumes the air con units (including installation) cost over $1,000
*if under $1,000 they can be claimed at even higher rates.
18.75% pa in the first year then 37.5% pa each year thereafter in the Low Value Pool schedule.

When You Can’t Claim Tax Deductions for Air Conditioners

In 2017, the then Federal treasurer Scott Morrison, made it that 2nd hand plant and equipment assets can no longer be claimed as tax deductions.

Unless you meet one of two criteria:

• You own the property in a company name
• Your property is a commercial property (not residential)

So…
if your air conditioning unit isn’t Brand New or you don’t own the property in a company name and it’s a Residential rental property you can’t claim any tax deductions on that existing air conditioning plant.

But you can claim it as a Capital Loss when you sell your property.

Commerical Rental Property Air Conditioning Depreciation

Commerical Property gets treated differently to residential rental property.

Basically, Commercial rental property can claim virtually everything as a tax depreciation dedcuton in their tax depreciation schedule. Air Conditioners included. New or old.

Capital works:

Under division 43 you can claim the ducting for air conditioners- regardless of age. It could be brand new or 30 years old. It doesn’t matter in the capital allowance schedule as you can still claim the depreciation.

It’s calculated at 2.5% pa of the original installed cost.
For a typical house this could be $5,000 worth of ducting claimed at 2.5% (totalling $125/yr in tax deductions).

Is electrical work tax deductible?

When your electrician installs the air conditioner there will be electrcial work needed. In some cases, a significant re-wire of the house or meterbox may be required. In these cases the electrcial work is claimed as a capital works item tax deductible at 2.5% pa

Types of air conditioning and their effective life:

• Wall/window mounted systems: Effective Life:10 years
• Split Systems: Effective Life:10 years
• Cassette Systems: Effective Life: 10 years
• Ducted Systems: Effective Live: 15 years

Scrapping of older air con units

When an asset gets demolished or dumped before it has been fully depreciated in your tax depreciation schedule it can have the residual value written off in one lump sum.
We call this scrapping value.

Let’s say you throw out an air conditioner after 4-years because it had a major fault.

According to your tax depreciation schedule it may still have a residual value of, say, $2,000.
Instead of continuing to depreciate the air con year after year (which is now located at the bottom of a big pile at the dump) you can claim that $2,000 as an instant asset write off at 100% in the financial year the item was scrapped.

Plus… under the ATOs repairs and maintenance rules, you may even be able to claim the new replacement air conditioner as a 100% instant asset write-off too.

But to do this, the replacement air conditioning unit must be a like-for-like replacement.
Upgrading from a 2.0kw split system to a 3.0kw split system may be seen by the ATO as an upgrade.
This would mean you claim the new air conditioning unit at 20% pa rather than 100%

Claiming Deductions for Repairs and Maintenance of Air Conditioners:

When carrying out repairs and maintenance on your rental investment property you may be able to claim all costs as tax deductions. And sometimes even at 100% instant asset write-off!

It is best to ask your Quantity Surveyor how best to claim the tax deductions for your air conditioner maintenance and repairs

Older Investment Properties:

Older properties often need electrical upgrades before installing Air Conditioning systems. And that means you can claim those upgrade costs as a tax deduction. Even if you didn’t pay for them!
If the previous owner spent money on Capital Improvements like electrical wiring, safety switches and fuses, you can claim those costs in your tax return. All you need do is have the Quantity Surveyor assess and calculate the original installation costs for these items. If you’ve got a good accountant they’ll be able to help with some questions too.
We will then incorporate the costs into your tax depreciation schedule to ensure we maximise your annual tax refund

If you found this helpful, you may also find some of my other articles beneficial too. And to see some real life examples of what our clients have been receiving in tax depreciation deductions, check out our Client Portfolio page.

You can even get a free quote from us here or do further reading about tax depreciation here

This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying

Published January 2023