Immediately Write Off $300 and Low-Value Pooling
Depreciation deductions are pro-rated depending on when you take ownership of a property. However, like with everything, there are exceptions to the rule.
A Sydney client of ours settled on a one-bedroom Chatswood unit on June 25th last year. The property was built in 1999 and the purchase price was $450,000. Yet, their total tax deduction, which was for five days only, was more than $5,000.
“What’s the catch?” I hear you ask. Well, there isn’t one! The ability to make such a significant deduction for just a short period of time is due to the immediate write-off and low-pooling of items that are classified as plant and equipment.
The costs of ‘small items’ (valued at $300 or below) and ‘low-pooled items’ (totalling no more than $1,000) should not be pro-rated, instead they can be written off immediately. You can maximise these items whether the property has been owned for 1 day or 365 days. And the age of the property is not relevant to claiming small items or low-value pooled items. Plant and equipment in properties of any age are eligible for depreciation allowances.
There is a saying that goes, “a dollar today is worth more than a dollar tomorrow”, so deduct these items as quickly as possible.
What if you are a joint owner of a property?
Say an electric motor to the garage door cost the owners of an apartment block $2,000. If there are 50 units in the block, your portion is $40. You
can claim that $40 outright as your portion is under $300. Provided your portion for any joint area is under $300, you can still write it off in your taxes.
Items that depreciation faster:
Another tip is to buy items that depreciate faster. Items costing between $300 and $1,000 fall into the low-pool category and attract a higher depreciation rate. A $1,200 television attracts a 20% deduction while a $950 TV deducts at 37.5% per annum.
Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.
If you’re not an accountant, or this is your first depreciation schedule, reading all those figures can be a little daunting.
Of course you could just give the report to your accountant and let them sort out your claims for you, but maybe you want to understand how you’ve saved all that money!
There are four main terms you must understand in order to read your report:
- Building Allowance: this is the deduction available to offset the hard construction costs of your property (including concrete, brickwork, etc.). Generally the Building Allowance will equal the total original construction cost plus any renovations, minus non-eligible costs and plant and equipment values. It can be claimed at 2.5% for properties built after 1987.
- Plant and Equipment: this refers to the fixtures and fittings within a building that are relatively easily removable (including ovens, light fittings, carpet, blinds, etc.). Plant and equipment is able to be claimed at a faster rate than Building Allowance – the rate is dependent on the item’s Effective Life.
(Note: your report may show low or no plant and equipment deductions if your property is affected by the 2017 Budget – read more about those changes here).
- Diminishing Value (DV): this is one of two methods you can choose to claim your depreciation. The DV method front loads your deductions, recognising that most Plant and Equipment items tend to lose a higher portion of their value early on.
- Prime Cost (PC): this is the other method you can choose. The PC method spreads out your Plant and Equipment deductions evenly.
(For more information on the differences between the two methods – click here.)
Now to the specific pages of your report:
In a sense, there are two copies of each type of page: one for the DV method and one for the PC method. For the most part, they are the same, although apply different rates to the plant and equipment assets.
The ‘Construction Summary’ pages for both DV and PC methods, show the calculations made to arrive at your total Building Allowance. The total figure for each method will be the same.
The next few pages for each method are the ‘Schedule of Depreciable Items’. These pages show the values and depreciation rates of individual plant and equipment items, owner included or previous owner renovations (if applicable) and the total Building Allowance again.
The DV ‘Schedule of Depreciable Items’ will show effective lives of ‘<=$300**’ and ‘Low Pool*’ for some assets. ‘<=$300’ are items with a value less than or equal to $300, and are eligible to be fully deducted in the first year of ownership. While ‘Low Pool’ items are those valued at less than $1000, and are depreciated at 18.75% in the first partial year of ownership, and 37.5% in subsequent years.
The ‘<=$300’ and ‘Low Pool’ assets are not available in the PC method, and therefore won’t be shown in the PC ‘Schedule of Depreciable Items’.
The ‘Year End Summary’ for both methods are similar, with the DV version showing an extra column for ‘Low Value Pool Items’. The figures to focus on here are in the ‘Amount Claimable’ column, showing the total claim per financial year, already prorated based on your settlement or construction completion date.
Finally, the ‘Graph’ page shows your total claims over the first 20 years of ownership. Each bar shows two financial years’ worth of claims, increasing cumulatively. It also provides a comparison between the rate of claims between the DV and PC methods.
If you have any further queries regarding your depreciation schedule, contact [email protected]