Both new and established investment properties attract depreciation deductions for their owners. However, there are differences in what owners are eligible to claim.
We have outlined below the differences in depreciation eligibility between new and established investment properties.
Depreciation overview
Depreciation is the natural wear and tear of a property and its assets over time. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this as a tax deduction.
Depreciation is claimed under two categories. Capital works deductions (Division 43) are claimable on the building’s structure and assets permanently fixed to the property. Plant and equipment depreciation (Division 40) is claimable on assets that are easily removable from the property or mechanical in nature.
Depreciation is claimed differently depending on the category and which method is used to calculate depreciation.
Capital works deductions are typically claimed at a rate of 2.5 per cent over the life of the property (forty years) from the construction completion date. Meanwhile, plant and equipment assets are claimed at a rate over their effective life set by the ATO. For instance, a dishwasher has an effective life of eight years with a depreciation rate of either 25 per cent if calculated under the diminishing value method, or 12 per cent if calculated under the prime cost method.
New properties
New properties generally contain higher depreciation deductions than established ones. This is because new properties are not affected by the 2017 legislation changes, and their owners are eligible to claim plant and equipment assets.
Construction costs generally increase over time, making capital works deductions on new buildings higher.
In the 2021-22 financial year, BMT data shows brand new properties claimed an average of $15,363 in first full-year depreciation deductions, while fairly new properties claimed an average of $8,032.
Established properties
Established properties are sometimes overlooked for depreciation deductions as investors think they’re non-existent. However, there are thousands of dollars in deductions available for older properties.
After the 2017 legislation changes, owners of second-hand properties could no longer claim deductions for existing plant and equipment assets.
This doesn’t necessarily mean plant and equipment assets in established properties can’t be claimed, they can, but they must be brand new. For instance, if a new dishwasher is installed while the property is income-producing, the owners can claim this because it’s a new asset.
Fortunately, capital works deductions are not affected by these changes and typically make up 85-90 per cent of a total depreciation claim.
BMT data shows properties affected by the 2017 legislation changes still claimed an average of $6,249 in first full-year depreciation deductions in financial year 2021/22. Even properties built in 1987 and prior claimed an average of $5,403 in depreciation deductions in the first full financial year.
Renovations
Many older properties have undergone ‘substantial renovations’, according to the ATO, which refers to when all, or substantially all, of a building is removed or replaced. However, the renovations need to involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roofs or staircases.
Owners can claim deductions for the substantial renovations commencing from the construction completion date, including new plant and equipment assets.
These types of renovations can be claimed – even when completed by a previous owner. Site inspections are essential in identifying these renovations to maximise a client’s tax deductions while maintaining full ATO compliance.
If you need assistance with your tax planning, contact KMT accountants today!
The article is provided by BMT Tax Depreciation. BMT Tax Depreciation is Australia’s leading supplier of residential and commercial tax depreciation schedules. To learn more about how depreciation can boost your cash flow, contact the expert team at BMT.
