How to Save Tax with Solar Panel Depreciation
…and the tax deductions you can claim as an investment property owner
Solar panels won’t just generate electricity and slash power bills… they’ll generate tax deductions too
Here’s How Residential Solar Panels Save You Tax
The ATO has determined the effective life of solar panels and solar panel assets to be 20 years. But this does not mean they will last 20-years. My in-laws installed a 20kw system on their roof (at great cost) only to have the inverter die after 8-years.
*I’m fairly confident in coming years the ATO will reassess the effective life of solar panels and solar panel assets and bring them down to 12-years. This will be of great benefit to property investors. As it means bigger tax deductions over a shorter period of time.
Effective life of Solar Panels
Currently: the effecitvie life of solar panel assets in Australia is 20-years.
This means you can claim 5% (of the cost) per annum depreciation under the Prime Cost Method of depreciation.
Or… 10% pa under the faster Diminishing Value Method.
Note: This is based on brand new solar assets not second hand items.
Photovoltaic electricity generating system assets
- Effective Life: 20 years
- Diminishing Value Rate: 10% per annum
- Prime Cost Rate: 5% per annum
Example of How Solar Panels Save You Tax
Let’s say your investment property has a rent return of $30,000 per year.
(That’s just under $600/wk in rent)
You are paying tax on the entirety of that $30,000 -so why not try and reduce the tax by increasing your Deductions.
This is where a tax depreciation schedule comes into play.
The more deductions your quantity surveyor can secure for you – the less tax you pay.
Instant Asset Write-off
Unfortunately you can’t claim instant asset write off on your solar panel installation. (unless you’re a small business, where in some cases you can. You can read more about that on our tax depreciation for Commercial property page)
But under Division 40 deductions you can claim as much as 10% of the fully installed cost as a yearly tax deduction.
Note: The 10% is based on the written down value at the end of each year. Not the original value.
On a $15,000 solar setup:
The first year deductions wound be $1,500
($15,000 x 10%)
- Year 2 deductions
($13,500 x 10%)
- Year 3 deductions
(12,150 x 10%)
- Year 4 deductions
($10,935 x 10%)
…And so on, until your solar panel setup has a written down value of $1,000 or less.
It’s at this point the solar panels will jump out of the Diminishing Value method spreadsheet (claimed at 10% pa) and into the Low Value Pool spreadsheet.
Here they’re claimed at 18.75%pa in that first year and 37.5% pa each year thereafter.
Until their value is $0
So when your accountant is doing your tax return, they’ll take that yearly deduction for the solar panels and mark it off against your rental income as an ‘on paper loss’ aka tax depreciation deduction.
You may even find your property becomes negatively geared.
This means you’ve got so many tax deductions marked off against your rental income that you’ve actually ’lost money’ on paper.
That means no tax on your rental income and may even mean less tax on other income streams you have. Like your main occupation income stream.
This could create a significant cash-flow bonus in your life
When can you claim instant asset write off for solar panels?
You can claim instant asset write off on replacement items as these are generally considered repairs and maintenance.
Under ATO tax depreciation rules you can claim repairs and maintenance as a 100% tax deduction in the financial year the expense occurred.
But you have to be careful how you go about it.
Replacing all the panels for better ones wouldn’t constiture repairs and maintenance. But rather an upgrade.
Thankfully, you’d still be able to claim the costs at 10% p.a. – just not the 100% you were hoping for
But should you replace just a couple of panels, that are damaged, or a busted inverter – then they are considered repairs & maintenance and claimable at 100% write-off
When you Can’t claim tax Deductions solar panels
If you’ve purchased an investment property that already has solar panels installed and working (and the property is more than 6-months old) you are unable to claim the yearly tax deductions for the solar panels.
Exception to the rule:
If you purchased the property in a company name then you may be entitled to claim the depreciation deductions for the ‘2nd hand’ solar panel assets in the same way you can when the solar panels are brand new.
Government Solar Rebates
You Can’t claim a tax dedcution for any government rebates on solar assets.
So, if the system cost $20,000 but government rebates meant you paid jsut $10,000 you can only claim the $10,000 as a tax depreciation deduction on your rental property.
Insurance for Your Solar Panels
Aside from the tax deductions, you’ll need to insure your solar panels. But at the full price – not the ‘after rebate’ price. As you can only apply for the rebte once. If your panels get damaged or destroyed, you’ll have to pay full price for the replacements
Increased Rental Yield
A $15,000 solar generation system can reduce power bills by as much as $12/day.
(Many factors are at play here; like feed in tariff rates, amount of electricity used by tenants during the day, and many more factors).
But if you allow $10/day in power bill reduction, in theory tenants should be happy to pay $5/day more in rent.
That’s an extra $1,800/yr in rental income. Maybe even more.
Many of our clients have solar panels installed on their investment properties. I recently tallied up how many of the reports I was preparing included solar panels systems and it’s as high as 63%. This alone should be incentive enough to go solar on your property, as tenants may actually be discouraged to rent properties without solar
Approximately 70-75% of all Queensland homes now have solar
Want to see some real world results
The best place to see what other investors are getting in tax depreciation deductions for properties similar to yours is by visiting our client portfolio page here
For further reading on more of our quantity surveyor articles click here
Or to visit our home page for Brisbane tax depreciation services click here
This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying
Or to get in touch for more information – or for a free quot for yuor investment property simply click here