As a property investor in Australia, understanding the concept of depreciation is crucial to maximising your tax savings and boosting your investment returns. Depreciation allows you to claim deductions for the wear and tear of your residential investment property, maximising cash flow and reducing taxable income. The rules and regulations differ depending on whether you own a commercial or residential property.
In this article, we’ll break down the key differences between commercial and residential property depreciation, helping you make informed decisions and take full advantage of the tax benefits available to you.
What is Property Tax Depreciation?
Property depreciation is a non-cash deduction that recognises the decline in value of your investment property and its assets over time due to wear and tear. The Australian Taxation Office (ATO) allows property investors to claim depreciation deductions, which can significantly reduce their taxable income and increase their cash flow through tax deductions.
There are two main types of depreciation deductions:
Capital works deductions (Division 43): These relate to the structural elements of the property, such as the roof, walls, and foundations.
Plant and equipment deductions (Division 40): These relate to the removable assets within the property, such as appliances, carpets, and blinds.
Capital Works Deductions
Capital works deductions apply to the structural components of your investment property, and claiming depreciation deductions can significantly benefit residential investment property owners. The deductions you can claim and the rates at which you can claim them differ between commercial and residential properties.
Commercial Property Capital Works Deductions
The ATO sets out the calculation rules for commercial property capital works deductions based on the type of property, its usage, and the date construction commenced. Commercial leases often involve annual rent increases, flexible lease terms, and can be structured as net or gross leases, which can impact the overall cash flow and deductions. Here’s a table summarising the depreciation rates for different types of commercial properties:
Understanding Capital Works Deductions
Capital works deductions, also known as Division 43 deductions, allow property investors to claim tax deductions for the structural elements of their investment properties. These deductions apply to components such as the roof, walls, foundations, and other permanent fixtures. The table below provides examples of capital works deductions for both residential and commercial properties:
Calculating Capital Works Deductions for Commercial Investment Properties
The Australian Taxation Office (ATO) has established specific rules for calculating capital works deductions for commercial investment properties. These rules take into account the type of commercial property, its intended use, and the date construction commenced. The following table summarises the depreciation rates applicable to different types of commercial properties:
| Commercial Property Type | Travellers Accommodation (such as a hotel) | Non-residential (such as an office or retail shop) | Non-residential used for industrial activities (such as a manufacturing plant or factory) |
| Rate of commercial Property Depreciation | Construction commenced between: 22 Aug 1979 and 21 Aug 1984: 2.5% per year 22 Aug 1984 and 15 Sep 1987: 4% per year 16 Sep 1987 and 26 Feb 1992: 2.5% per year Construction commenced after: 27 Feb 1992: 2.5% per year | Construction commenced between: 20 Jul 1982 and 21 Aug 1984: 2.5% per year 22 Aug 1984 and 15 Sep 1987: 4% per year Construction commenced after: 16 Sep 1987: 2.5% per year | Construction commenced after; 26 Feb 1992: 4% per year |
Plant and Equipment Deductions
Plant and equipment deductions apply to the removable assets within your investment property. The depreciation rates for these assets are based on the ATO’s “asset effective life schedule,” which outlines how long each asset is expected to last.
A tax depreciation schedule is crucial for claiming maximum deductions on plant and equipment. It covers all available deductions over the property’s lifetime and provides a step-by-step process for completing the schedule.
For example, a ducted air conditioning system has an effective life of 20 years, while a carpet has an effective life of 10 years.
It’s important to note that there are limitations for residential property investors when it comes to claiming plant and equipment deductions for second-hand assets. If you purchased a second-hand residential property after 7:30 pm on 9 May 2017, you cannot claim depreciation deductions for any existing plant and equipment assets. However, you can still claim deductions for any new assets you purchase and install in the property.
Maximising Depreciation Deductions
To make the most of your depreciation deductions, it’s essential to engage a qualified Quantity Surveyor who can prepare a comprehensive depreciation schedule for your investment property. A depreciation schedule outlines all the deductions you can claim over the life of your property, helping you save money on your tax bill each year.
Collaborating with Thrifty Tax and accountants can further maximise your depreciation claims, ensuring you get the most out of your investment.
At Thrifty Tax, our team of experienced Quantity Surveyors specialises in preparing depreciation schedules for both commercial and residential properties. We use our expertise to identify all the deductions you’re eligible to claim, ensuring you maximise your tax savings and improve your investment returns.
Key Takeaways
Property depreciation allows investors to claim deductions for the wear and tear of their investment properties.
There are different depreciation rules and rates for commercial and residential properties.
Commercial properties tend to have higher income potential compared to residential properties due to the type of customers and more investment opportunities.
Capital works deductions apply to the structural elements of a property, while plant and equipment deductions apply to removable assets.
The ATO sets depreciation rates for commercial properties based on the type of property, its usage, and the construction date.
Residential depreciation rates are determined by the property’s construction date.
Residential investors cannot claim depreciation deductions for second-hand plant and equipment assets purchased after 9 May 2017.
Engaging a qualified Quantity Surveyor to prepare a depreciation schedule is crucial to maximising your deductions and tax savings.
By understanding the key differences between commercial and residential property depreciation, and seeking professional advice from a Quantity Surveyor, you can take full advantage of the tax benefits available to you as a property investor. To learn more about how Thrifty Tax can help you maximise your depreciation deductions, contact our team today.