Depreciation schedules are an often overlooked tool that can significantly increase cash flow and improve overall profitability.
A properly prepared depreciation schedule allows property investors to claim substantial tax deductions each year, helping to offset expenses. Many investors focus on rental yields and capital growth to maximise returns on an investment property.
What is a Depreciation Schedule?
A tax depreciation schedule is a professional report prepared by a quantity surveyor that details the depreciation deductions available on a property over time. Depreciation refers to the decline in value of an investment property’s structural elements and fittings, and this loss can be claimed as a tax deduction.
As MCG Quantity Surveyors explain:
In simple terms, this means a well-structured depreciation schedule can help property investors reduce taxable income for decades, providing a valuable long-term benefit.
The Two Main Types of Depreciation
Depreciation is divided into two distinct categories, each with its own rules and eligibility criteria:
1. Capital Allowance (Division 43)
This type of depreciation applies to the structural components of a property, including:
- Foundations and concrete slabs
- Roofs and walls
- Driveways and fencing
For residential properties, Division 43 deductions are only available for properties built after 15 September 1987. For commercial properties, the cut-off date is July 1982. The depreciation rate is fixed over either 25 or 40 years, as per ATO guidelines.
2. Plant and Equipment (Division 40)
This category covers removable fixtures and fittings that depreciate at a higher rate. Items under Division 40 include:
- Air conditioners
- Carpet and blinds
- Ovens and range hoods
- Hot water systems
Unlike capital allowance, plant and equipment deductions are based on the asset’s effective life as determined by the Australian Tax Office (ATO). This means certain assets can be written off faster, delivering more immediate tax benefits.
Why Depreciation Schedules Are Essential for New Builds
While depreciation can be claimed on both new and older properties, new builds offer the most significant tax advantages. This is because:
- Maximum Capital Allowance Deductions: Since new properties qualify for Division 43 deductions from the date of construction, investors can claim the full 40-year benefit.
- Higher Plant and Equipment Deductions: Newly installed assets have a longer effective life, meaning greater upfront deductions.
- No Previous Ownership Issues: Older properties may have already had plant and equipment depreciation claimed by previous owners, making them ineligible for further deductions.
Investors purchasing off-the-plan or building from scratch should prioritise obtaining a depreciation schedule to ensure they capitalise on all available deductions from day one.
The Financial Benefits of a Depreciation Schedule
Many investors underestimate the value of depreciation, but the savings can be substantial. A professionally prepared tax depreciation schedule can result in thousands of dollars in deductions annually.
Furthermore, since the cost of preparing a depreciation schedule is 100% tax deductible, investors have nothing to lose by engaging a quantity surveyor to assess their property.
How to Get a Depreciation Schedule
To ensure accuracy and compliance with ATO regulations, property investors should engage a qualified quantity surveyor to prepare their depreciation schedule. A Quantity Surveyor will:
- Conduct a site inspection to assess all depreciable assets
- Apply ATO-approved depreciation rates and methods
- Ensure the schedule meets current tax legislation
For property investors, a depreciation schedule is an essential tool that can dramatically improve cash flow and reduce tax liabilities. Investors can miss out on substantial tax deductions if they don’t obtain a depreciation schedule. These deductions can potentially amount to thousands of dollars annually.If you own an investment property, especially a new build, speak to a qualified quantity surveyor today and start claiming the tax deductions you’re entitled to.
Contact us to discuss further your investment property.