Have you ever wondered how Washington Brown actually figures out the amount of deductions you will receive?
Well, tax legislation sets down the way in which to calculate depreciation using the diminishing value method.
Basically, you take the number 200 and divide it by the item’s effective life. For example, 10 years, and express that as a percentage (200/10 = 20% in this example).
The depreciation rate applies to the diminished value of the asset after it has been depreciated each year.
Take, for example, a $10,000 asset with a useful life of 10 years. Hence a 20% diminishing value depreciation rate, as we just explained.
You could claim a $2,000 deduction in your first year (i.e. $10,000 x 20%), a $1,600 deduction in your second year (i.e. ($10,000 – $2,000) x 20%) and so on. These amounts continue to reduce in subsequent years. You would only claim a $268 deduction in your tenth year.
The diminishing value method is generally preferred. This is because a tax dollar saved today is worth more than a tax dollar saved in a later year. Also, if you’re planning on upgrading that item in the next couple of years, this gets the most out of your claim as soon as possible.
Speak with Australia’s Property Depreciation Experts, Washington Brown, and maximise the tax deductions you can claim on your investment property today.
Now, let’s work through a diminishing value calculation.
EXAMPLE: Let’s say you re-carpet your unit (which is an investment property) at a cost of $4,000. Carpet has a 10-year effective life and you could calculate the diminishing value depreciation as follows:
Year 1 – $4,000 x 25% = $1,000
Year 2 – ($4,000 – $1,000) = $3,000 x 25% = $750
Year 3 – ($3,000 – $750) = $2,250 x 25% = $562.50
And so on, and so on.
While still on this topic of plant and equipment depreciation, it is worth reiterating that there are some special rules that apply to lower cost assets.
You can claim an immediate deduction, (i.e. 100% of the cost price) for items costing $300 or less.
Items which cost more than $300, but less than $1,000, can be allocated to a ‘low value pool’ and are depreciated at 37.5% per year under the diminishing value method. Note, however, that an asset is depreciated at 18.75% in the year that it is added to the low value pool.
Generally speaking, it pays to have a little bit of tax knowledge. It’s worth remembering that individual items under $300 can be written off immediately and if your portion of a more expensive item is under $300, you can still write that off too.
5 Tips for Maximising Property Depreciation Deductions Using the Diminishing Value Method
1. Opt for assets with shorter lifespans: Assets with shorter effective lives allow you to claim deductions faster. For example, a $1,000 asset with a 5-year effective life would result in a $400 claim in the first year, whereas a $1,000 asset with a 10-year effective life would only have a $200 claim in the first year. An example of a rental property asset with a shorter lifespan could be a carpet (8 Years) compared to floating timber flooring (15 Years).
2. Choose plant & equipment assets over capital works: For instance, installing $4,000 worth of carpet may enable a depreciation claim of approximately $1,000 in the first year. In comparison, if tiles were installed for $6,000, the claim would be around $150.
3. Take advantage of Immediate Write-off Provisions: Although not directly related to the diminishing value method, this provision allows you to front-load your deductions. Assets classified as Plant & Equipment costing less than $300 can be claimed immediately in their entirety, rather than being depreciated over time.
4. Split deductions among property owners: If you co-own the property with another individual or entity, consider splitting the deductions between the owners. This strategy allows each owner to claim the assets separately. For example, if your 50% share reduces the cost of an asset from $500 to $250, you can claim the entire $250 immediately.
5. Install new plant & equipment assets after moving out: To claim depreciation using the diminishing value method for residential Plant & Equipment assets, they must be brand new. If you are residing in the property, it is advisable to install these assets after you move out to avoid the Australian Taxation Office (ATO) treating them as “previously used” and potentially denying any deductions.
Note: It is crucial to consult with a qualified quantity surveyor to calculate and claim depreciation deductions accurately.
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Compare Diminishing Value deductions to Prime Cost deductions.
This is the first calculator to draw on real data to determine an accurate estimate. It allows you to work out the likely tax depreciation deduction on an investment property without the requirement of entering the sqm of the property.
