What is Rental Property Depreciation?
As your property ages, the building structure itself as well the assets within it experience wear and tear- they depreciate. The Australian Taxation Office (ATO) states that rental property owners can claim depreciation as a tax deduction, which can be claimed under two categories – capital works and plant and equipment assets.
What is Property Plant and Equipment?
Understanding the assets you’ve purchased is essential when it comes to investment. After buying an investment property, you can claim deductions on the ‘wear and tear’ it experiences. Typically, property investors divide these deductions into 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 stoves, air conditioners, carpet or light fittings.
After the 2017 Federal Budget, it’s crucial to note that many investors can only claim depreciation on newly purchased 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 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 vary according to their useful lives.
| Air-Conditioning | Lifts | Rain Water Tanks and Pumps |
| 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 | Swimming pool filtration equipment |
| Dishwashers | Microwave ovens | Television sets |
| DVD players | Ovens | Washing machines |
| Exhaust fans | Pumps | Window blinds |
| Linoleum | Range Hoods | Window curtains |
| Ceiling fans | Floating timber | Vinyl flooring |
| Heaters – Electric | Light fittings | Heated towel rails – Electric |
| Refigeratros | Freestanding cookers | Clothes dryers |
| Automatic garage doors (controls) | Automatic garage doors (motors) | Barbecues |
| Security alarm system | Artificial grass | Clothesline |
| Access control systems (Intercoms) |
Would I be able to claim depreciation on a fully renovated property?
If the rental property has had quite a significant amount of renovations by the previous owner for selling purposes, you would be able to claim depreciation only on the qualifying capital works deductions.
However, for a more accurate estimate, a quantity surveyor will assess anything in the property that may fall under the previous renovation and calculate accordingly. This can include items such as plumbing, waterproofing, and electrical wiring.
What is the Property Plant and Equipment (PP&E) Depreciation Rate?
You must note that different items depreciate at different rates when claiming your deductions. The depreciation rate for property plant is bed on the asset’s effective life (EL) while 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 is calculated, for an asset, by dividing its value by its effective life.
For example, the ATO states that a brand-new Air Conditioner has a useful life of 10 years. Using the Prime Cost method of depreciation, if the purchase price of the Air Conditioner is $2000, you can claim $200 per annum.
How much can I claim on my investment property?
If measured reliably, you can work out your total depreciation claims on your investment property. Our depreciation calculator can provide you with an accurate estimate on your potential tax savings.
What is the difference between prime cost method and diminishing value method?
As demonstrated above, the prime cost method of depreciation calculates a plant and equipment asset’s annual decline in value across its lifespan. This method is helpful if you want your accumulated depreciation deductions to be more evenly spread during your ownership of an investment property.
The diminishing value depreciation method accelerates the property plant and equipment depreciation rate. Essentially, it allows the investor to claim more depreciation during the early years of an asset’s life. This method assumes that an item of property plant 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)
OR
$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.
What assets valued under $300 can I claim?
The ATO also allows investors to claim an immediate deduction in the first year of ownership if the cost of an 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 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 shares would be below $300.
What is low-value pool?
You can allocate low-cost and low-value assets 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. If, as of July 1 (for the current year), an asset had depreciated to less than $1,000 under the diminishing value method, it is considered a depreciating asset.
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.
Would my accountant be able to calculate depreciation for my rental property?
According to Tax Ruling TR 97/25, quantity surveyors are best suited for this as they possess the skills and knowledge to assess your construction costs and determine its depreciation values.
Accountants, property managers nor valuers are qualified to estimate the construction costs.
How can I maximise my 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 can give 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 and 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
Get a FREE depreciation quote TODAY
What happens if you no longer use the property plant and equipment?
If you have items you no longer use or have disposed of, a balancing adjustment event will occur. A balancing adjustment means you must 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 a fixed 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.