Tax depreciation schedules are essential tools for property investors who want to claim deductions for the decline in value of their property and its assets over time. Depreciation is often one of the largest deductions available to property owners after loan interest, yet many investors either don’t claim it or miss out on the full amount they are entitled to.
This guide explains what tax depreciation schedules are, how they work, and why they are important for investment property owners to maximise their tax benefits.
What Is a Tax Depreciation Schedule?
A tax depreciation schedule is a detailed depreciation report that outlines the deductions you can claim for the wear and tear (depreciation) of your investment property’s structure and its assets.
The Australian Taxation Office (ATO) allows owners of income-producing properties, including residential investment properties, to claim this depreciation as a tax deduction, which can significantly reduce your income tax payable. Property owners can claim tax deductions and depreciation allowances for the decline in value of their assets, which reduces their assessable income and improves cash flow by lowering tax liabilities on rental income. Since properties and their fixtures lose value over time due to age and usage, a property depreciation schedule helps you calculate how much of this loss you can deduct from your taxable income each year.
The schedule is prepared by fully accredited quantity surveyors, who are qualified to prepare tax depreciation schedules in compliance with ATO guidelines. This report covers two main types of depreciation:
Capital Works (Division 43)
- This refers to the structure of the building, including walls, floors, roof, and other permanent fixtures.
Plant and Equipment (Division 40)
- These are the removable or mechanical assets within the property, such as appliances, carpets, and air conditioning units.
Why Do Property Investors Need a Depreciation Schedule?
A property tax depreciation schedule is necessary if you want to claim the full tax benefits available on your investment property. Depreciation is a non-cash deduction, which means it reduces your taxable income without requiring you to spend extra money each year.
Some key reasons why a depreciation schedule is important:
- It helps you legally reduce your taxable income and income tax liability.
- It increases cash flow by lowering your annual tax payable on rental income.
- It accounts for both the building structure and its internal assets, ensuring maximum depreciation return.
- It is valid for up to 40 years and only needs to be prepared once per property by registered tax agents or qualified quantity surveyors.
- It can accommodate split ownership, allowing deductions to be apportioned according to percentage ownership of the property.
Without a tax depreciation schedule today, many property investors unintentionally miss out on claiming legitimate deductions and immediate tax deductions over the life of their property.
Tax Depreciation Schedule Cost
The cost of a tax depreciation schedule varies depending on factors such as:
- Whether the property is residential or commercial (costs may differ for commercial properties).
- The age and type of building.
- The extent of included assets (plant and equipment).
- Whether a physical inspection is required.
Regardless of these factors, the fee for preparing a depreciation schedule is fully tax-deductible and represents a worthwhile investment to maximise your tax benefits.
What’s Included in a Depreciation Schedule?
A tax depreciation schedule typically includes:
- An annual breakdown of Division 43 (capital works) deductions with yearly claim amounts and year depreciation values.
- A list of Division 40 (plant and equipment) assets with their effective lives as determined by the Australian Taxation Office, which are used to calculate the depreciation rate.
- Details of plant and equipment depreciation for removable assets such as hot water systems and air conditioners.
- Depreciation calculations using both the Prime Cost and Diminishing Value methods, with the depreciation report outline detailing the method claims as options for calculating depreciation.
- A 40-year forecast of claimable deductions.
- Asset pools for low-value and small-value items where applicable.
- Coverage of structural elements and capital improvements, including capital works allowance for original construction cost and eligible renovations.
- Reference to historical construction costs, estimate construction costs, and improvements made by previous and current owners or if the property has been substantially renovated.
- An outline of eligibility for depreciation claims on second-hand and existing properties, in line with current legislation.
- Clear summaries designed to assist both property owners and accountants in completing tax returns.
The schedule is designed to comply with Australian Taxation Office regulations and provides a comprehensive guide to how much you can claim in depreciation each year.
Example of How Depreciation is Claimed
Consider a residential property built in 2006 with a construction cost of $300,000 for Capital Works. Under Division 43, the property is eligible for a capital works deduction of 2.5% per year over 40 years.
Annual deduction: $300,000 × 2.5% = $7,500 per year.
If the property is rented out for the full financial year, the owner can make a depreciation claim for the full $7,500 on their tax return for that year. If the property is only rented for part of the year, the depreciation claim would be adjusted (pro-rated) based on the number of rental days.
Additional deductions may also apply for plant and equipment assets, such as kitchen appliances, carpets, and air conditioning units, each depreciating over their own effective life.
How Is a Tax Depreciation Report Prepared?
A qualified quantity surveyor, especially one who is a member of the Australian Institute of Quantity Surveyors (AIQS), prepares the depreciation schedule. The process generally involves:
- Gathering information about the property’s type, age, and history of construction or renovations. The surveyor will also arrange access to the property with the owner or property manager to facilitate the next steps.
- Estimating construction costs, if necessary, based on Australian Taxation Office-compliant methods. Once all necessary data is collected, the surveyor will begin preparing the detailed depreciation report.
- Preparing a detailed report that breaks down capital works and plant & equipment deductions over the property’s effective life, providing yearly claim amounts and method claims for depreciation.
Once completed, the schedule can be used by your accountant or registered tax agents to claim depreciation deductions each year.
Good record keeping is essential for property investors to ensure compliance with tax regulations and to maximise allowable deductions.
Key Things to Know About Depreciation Schedules for your Investment Property
- You only need one schedule per property, which lasts up to 40 years.
- Deductions can be claimed on original construction costs and eligible renovations.
- Capital works deductions apply at a set rate (usually 2.5% for residential properties).
- Plant and equipment items depreciate at different rates based on their effective life.
- You can choose between the Prime Cost or Diminishing Value method for claiming deductions.
- The cost of having a depreciation schedule prepared is a deductible expense.
- A knowledgeable support team is often available to assist with any questions during the process.
- When planning for your next investment property, having a tax depreciation schedule ready can maximise your tax benefits from the start.
Frequently Asked Questions
What is a tax depreciation schedule?
A tax depreciation schedule is a document that lists the depreciation deductions available on an investment property’s structure and assets over time. It is used to claim annual tax deductions.
Do I need a depreciation schedule every year?
No. A single depreciation schedule covers a property’s depreciation for up to 40 years. You only need to update it if significant renovations are made.
Can I claim depreciation on a second-hand property?
You can claim capital works deductions on second-hand and existing properties. However, for plant and equipment, deductions are limited to assets you purchase and install yourself after owning the property, due to legislative changes in 2017.
How much does a tax depreciation schedule cost?
The cost varies depending on the property type and scope of the report. The fee is fully tax-deductible and only needs to be paid once per property.
When should I arrange for a depreciation schedule?
Ideally, you should arrange for a tax depreciation schedule today soon after purchasing an investment property, before the end of the financial year, to maximise deductions in your first year of ownership and benefit from immediate tax deductions.
