Before feeling intimidated by the following explanation, if you so choose, all you really need to know is that a quantity surveyor can inspect your property and prepare a depreciation schedule for you, without you having to understand how exactly depreciation is calculated.
If that is the case, all you’ll need to do is hand it over to your accountant at tax time. That’s all you need to know, if you wish.
What if I do my own taxes?
You don’t need to worry about complicated calculations. In practice, it’s as easy as a phone call to a quantity surveyor to ensure you get all of your allowable depreciation deductions. He or she will produce a one-off report you can use year after year. Another benefit to you, is that you can claim the cost of that report as a tax deduction as well.
Many investors, however, will want to understand the process for themselves. So, now for the nitty gritty. Here is an explanation of the laws behind depreciation. To give you some background, there are two parts of the Income Tax Assessment Act 1997 we are dealing with here:
- Division 43 (Capital Works Allowance); and
- Division 40 (Plant and Equipment)
Note: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here.
The capital works allowance (more commonly referred to as the building allowance) refers to the construction costs of the building itself, such as concrete and brickwork. Plant and equipment refers to items within the building like ovens, dishwashers, carpet and blinds, etc.
Each of these two categories incurs claims. The building allowance is calculated between 2.5% and 4% per year of original construction costs (depending on the date of construction). Plant and equipment has a number of categories in which items are claimed at different percentages over their effective life. I’ve used the Washington Brown depreciation calculator to demonstrate the following example of how much you can claim on a standard $400,000, high-rise, two-bedroom unit in Melbourne.
Example of Depreciation Calculator:
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