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Depreciation Concept

Buildings decline in value because of ‘tear and wear’ like any other commodities. The decline in value, also known as property ‘Depreciation’, is regarded as loss in your investment cash flow, and will come back to investors’ pocket through Australian taxation mechanism.

Depreciation is a significant component of tax return associated with income producing properties ruled by Australian Taxation Office. Our primary goal is to maximize the return from your investment property within boundary of relevant legislations.

Property depreciation is not once-off deduction from your taxable income. It is ongoing deduction occurs every year in 40 or 25 years from completion of building works depending on different construction time.

Building type

All income producing properties attract depreciation. In the following scenarios you may benefit from depreciation of investment properties:

New building

We will estimate construction cost of the building and assess all relevant plant and equipment in line with ATO requirements. New buildings attract huge depreciation in first ten years, which may turn your cash flow into positive gearing.

Existing building

We use our historical data and costing system to provide construction cost for existing buildings under original market, and assess opening value of plant and equipment based on current market condition and purchase price. Many older buildings still attract generous depreciation.

Renovation or extension

Any renovation or extension can be claimed as deduction, even it is conducted by previous owner. We also provide pre-renovation inspection to determine ‘write off’ residual value before existing assets to be removed.

Off-the-plan development

A tax depreciation estimate indicates potential buyer the depreciation range of a particular property, which may help the buyer forecast cash flow of the investment.

Eligibility to claim Tax Depreciation

Legal owner or joint legal owners of an investment property can claim depreciation. Each person in joint legal ownership can claim deduction based on their share in the asset – for example, based on share of the cost of the asset, and according to their use of the asset.

Tax Depreciation to be prepared by a Quantity Surveyor

A tax depreciation schedule shall be prepared by a qualified Quantity Surveyor as per ATO tax ruling 97/25 for appropriate estimate of the construction costs, where those costs are unknown.

Depreciation Methods

Tax Depreciation comprises two types of deductions:

Capital Allowances & Depreciating Assets.

Capital allowances refer to building structure and improvement. Capital works depreciates on 2.5% or 4% per year depending on year of construction and type of buildings.

Depreciation on assets (plant & equipment) is based on curtain depreciating rate determined by their effective life which is regulated and reviewed by ATO.

Residential buildings constructed prior to 18 July 1985 are no longer eligible for capital allowances deduction, however, plant and equipment and all improvement after 27 Feburary1992 still attract substantial deduction.

The chart below illustrates basic tax depreciation structure:

Depreciation Example

The amount of property depreciation highly depends on type and age of building. Based on diminishing value method, median deductions of some typical new buildings in average Melbourne suburbs are shown below:

Building Type Purchase Price First Full Year Depreciation First Five Years Depreciation
1 bed unit $390,000 $9,000 $35,000
2 bed unit $600,000 $15,000 $55,000
3 bed unit $700,000 $18,000 $70,000
Townhouse $800,000 $20,000 $75,000
House $900,000 $22,000 $85,000
Office suite $900,000 $18,000 $70,000
Retail shop $800,000 $18,000 $70,000
Warehouse $5,000,000 $90,000 $330,000

FAQ

Most frequently asked questions are answered below, for other queries, please feel free to Contact Us

 

What does ATR Tax Depreciation Schedule include?

 

A standard ATR Tax Depreciation Schedule will include a depreciation summary and detail calculations from the date you become eligible to claim the deduction. Every year is calculated separately using both diminishing value and prime cost method.

 

Why choose ATR Building Consulting ?

 

Six good reasons to choose us:

  • ATR depreciation specialists are fully qualified quantity surveyors with years experience in various types of buildings. We are also registered with Tax Practitioner Board to comply with all regulations and legislations.
  • We provide follow-up services to update any addition or upgrade to your assets after your depreciation is completed.
  • All our existing clients will receive 5% discount on their property depreciation schedule.
  • Our fee for tax depreciation schedule is 100% immediate tax deductible.
  • Money back guarantee that your depreciation will be twice more than our fee in first full year, or your schedule will be free.
  • We provide both English and Chinese communication to our clients.

 

What is the difference between Diminishing Value and Prime Cost Method for plant & equipment depreciation?

 

Both Diminishing Value and Prime Cost methods are used to work out depreciation on plant and equipment as per Division 40 & 42 ITAA1997. Diminishing value depreciates on previous year balancing value, where as prime cost spread out deduction evenly throughout its effective life.

 

What is pooling?

 

There are Low Cost Pool and Low Value Pool. Low Cost Pool applies to items with value less than $300. From 1st July 2001, Low Value Pool applies to certain plants costing less than $1,000 or having an undeducted cost of less than $1,000, such plants could be allocated in Low Value Pool and depreciate on statutory rates.

 

Can I claim depreciation on older properties?

 

Yes, residential properties constructed before 18 July 1985 no longer attract capital allowance on building structure, however, plant and equipment may still depreciate depending on its age and condition.

 

Can I claim depreciation on renovations?

 

Yes, renovations and upgrade completed after 27 Feburary 1992 may have depreciation as per Division 43, you are able to claim the depreciation even if the renovation was done by previous owner.

 

Why do you need an inspection?

 

A site inspection is required for qualified quantity surveyors to fully understand and record condition of building and depreciating assets, in order to work out accurate and maximum depreciation results.

 

Can I still claim depreciation if I bought my investment property four years ago?

 

Tax return can be reviewed two years after lodging, so you can claim depreciation for previous two years only.

 

When am I eligible for tax depreciation?

 

You start claiming the depreciation when your property becomes ready for lease, could be your settlement date or other date down the track.

 

Does purchase price have impact on the amount of depreciation?

 

Yes, for second hand properties, cost of plant and equipment will be re-valued under current market condition.

 

How do you determine construction cost?

 

As qualified quantity surveyors, we have substantial building cost data and access to construction cost yearly index, which enable us to estimate construction expenditure and renovation cost as at different times.

 

What is plant & equipment?

 

There is no court definition of Plant & Equipment, but there are a number of decisions by Administrative Appeals Tribunal (‘AAT’). Click here for general classification of plants and capital works (Div 43)

 

Can my accountant prepare depreciation schedule?

 

Your accountant is not allowed to estimate the construction costs for properties built after 1985. Tax Ruling 97/25 issue by the Australian Taxation Office (ATO) has identified Quantity Surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown. Real estate agents, Property Managers, Accountants and Valuers are not allowed to make this estimate.

 

Does tax depreciation have impact on capital gain tax?

 

The base cost of capital gain will be calculated using your purchase price less capital allowance for held years, regardless whether you have claimed depreciation.

 

How to order ATR tax depreciation schedule?

 

We provide hassle free services to our valued clients. Once you place the order of tax depreciation report with us, we will send you a single page form ‘Property Information Request’. The only thing you need to do is fill out this form and send back to us. Then we will contact your tenant or agent to arrange inspection and get your depreciation report done within 3 business days after the inspection.