What is Property Plant and Equipment?
When it comes to investment, understanding the assets you’ve purchased is essential. After you buy an investment property, you can claim deductions on the ‘wear and tear’ it experiences. Typically, these deductions are divided into two components; capital works deductions or plant and equipment depreciation.
The ATO defines plant and equipment assets as those items that are easily removable or mechanical. Examples include things such as stoves, air conditioners, carpet or light fittings.
It is important to note that since the 2017 Federal Budget, most investors are only eligible to claim depreciation on brand-new plant assets. Some exceptions are if the property is commercial or industrial, if the property was purchased by a company (excl. SMSF), or if you owned and rented the property out before May 9, 2017.
What items can you claim property plant and equipment depreciation on?
Below are some of the common plant and equipment assets within residential properties. The rates at which these assets depreciate varies according to their useful lives.
|Air-Conditioning (Duct excluded)||Lifts||Rain Water Tanks|
|Beds||Freestanding furniture||Security Systems|
|Carpet||Garden Sheds||Shower Curtains|
|CCTV equipment||Gym equipment||Smoke detectors|
|Clothes dryers||Hose reels||Swimming pool cleaning equipment|
|Cooktops||Hot water systems (excluding piping)||Swimming pool filtration equipment|
|Dishwasher||Microwave ovens||Television sets|
|DVD players||Ovens||Washing machines|
|Exhaust fans||Pumps||Window blinds|
|Linoleum||Range Hoods||Window curtains|
Plant and Equipment Depreciation Rate
When claiming your deductions, you must note that different items depreciate at different rates. The depreciation rate for property plant and equipment is based on the asset’s effective life (EL).
The effective life refers to how many years the ATO estimates that a particular depreciating asset can be used to produce income. Hard-wearing assets, such as steel rainwater tanks have a longer effective life than fixtures that tend to be replaced more regularly, such as carpet.
The depreciation claim for an asset is calculated by dividing its value by its effective life.
For example, the ATO states that a brand-new Air Conditioner has an effective life of 10 years. If the Air Conditioner is valued at $2000, that means you are eligible to claim $200 per annum using the Prime Cost method of depreciation.
Use our free plant and equipment depreciation calculator to work out how much you could claim on your investment property.
Prime Cost Method
As demonstrated above, the prime cost method of depreciation is used to calculate a plant and equipment asset’s annual decline in value evenly across its lifespan. This method is helpful if you want your depreciation deductions to be more evenly spread during your ownership of an investment property.
Diminishing Value Method
The diminishing value method is used to accelerate the property plant and equipment depreciation rate. Essentially, it allows the investor to claim more depreciation during the early years of an assets life. This method is based on the assumption that an item experiences higher depreciation levels during the first few years of use.
Using the previous Air Conditioner example, the diminishing value claim would be $400 in the first year. This is based on the formula:
Base Value x (Days Held / 365) x (200% / EL)
$2000 x (365/365) x (200% / 10)
In the second year, the Base Value would be reduced to $1600 ($2000 – $400). This means that the deduction in Year 2 will be smaller than Year 1: $1600 x (365/365) x ($200% / 10) = $320.
Assets Valued Under $300
The ATO also allows investors to claim an immediate deduction in the first year of ownership if the item costs $300 or less. Common assets that fall into this category are ceiling fans, clotheslines, lamps, or remote controls. You cannot claim an immediate deduction if the asset is part of a more extensive set costing more than $300 in total.
Another interesting point is that the rules still apply if your individual interest in a more expensive asset falls under $300. For example, if you jointly own a property with your partner 50/50, you could each claim an immediate deduction for any assets costing less than $600. This is because your individual shares would be below $300.
You can allocate low-cost assets and low-value assets in regards to a low-value pool. These assets are claimed at 18.75% in the first year of ownership and 37.5% in every year after that.
Low-cost assets refer to all depreciating items that cost less than $1,000 at the end of the income year in which you began using it or had it installed ready for use for a taxable purpose.
A low-value asset is different. It is a depreciating asset if, on July 1 (for the current year), it had already been written off to less than $1,000 under the diminishing value method.
Once you have created a low-value pool and allocated low-cost assets to it, you must pool all other low-cost assets you have from that time onwards. It is important to note that this same rule does not apply to low-value assets.
Maximizing Your Depreciation
Claiming property plant and equipment depreciation can be pretty complicated. The purpose of understanding these deductions is so that an investor can ensure they are not paying more tax than they need to.
It is advisable to use a quantity surveyor to assist with depreciation claims. Quantity surveyors are capable of giving accurate assessments regarding the value of assets in the construction industry.
They can provide complete reports on claimable depreciation rates of plant and equipment. An accountant can then use this report to make your tax return claim.
At Washington Brown, we can produce reports for plant and equipment, as well as the property itself. We have several ways in which we can get the most out of your depreciation:
- Inclusion of plant & equipment when eligible
- Deductions from ‘Day 1’ rather than the generic beginning of the financial year
- Reports valid for 40 years (compared to 5 years from some of our competitors)
- Process and inclusions will be customized for your specific assets
What happens if you no longer use the property plant and equipment?
If you have items that you no longer use or have disposed of, then a balancing adjustment event will occur. A balancing adjustment means you need to work out an amount to include in your assessable income. If you do not do this, you will not be able to claim this in your deductions.
A balancing adjustment event will occur if any of the below happen;
• There is an alteration in the holding or interests of an asset that was meant to become a partnership asset
• You stop holding the asset, e.g. the asset is sold or lost
• You stop using the asset
The balancing adjustment amount is worked out by comparing the asset’s termination value and its adjustable value at the time of the balancing adjustment event.