A tax depreciation schedule is an essential tool for all residential property investors, commercial property owners and rural producers looking to maximise the benefits of owning an income generating property. If you don’t have one, you could be missing out on thousands of dollars each year in allowable depreciation.

Inspections are carried out on all properties and reports are prepared by trained and qualified Quantity Surveyors who are also Registered Tax Agents with the Tax Practitioners Board.

A Tax Depreciation Schedule (TDS) has two components:

• Capital works deductions
• Plant and Equipment depreciation

Capital works deductions

Capital works deductions are income tax deductions that can be claimed for expenses such as:

• building construction costs
• the cost of altering a building
• the cost of capital improvements to the surrounding property i.e. external improvements (fences, driveways, retaining walls etc.).

Capital works costs are deducted over 40 years.

Plant and Equipment depreciation

Plant and Equipment items for residential and commercial properties are items that can be easily removed including (but not limited to) carpets, hot water systems and air-conditioners, as opposed to items that are permanently fixed to the structure of the building. Plant items include mechanically or electronically operated assets, even though they may be fixed to the structure of the building.

These items are affected by the Federal Budget 2017 changes. These changes have been passed in parliament and fall under the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017. For residential property investors, Plant and Equipment depreciation deductions will be limited the following:

For properties purchased post 9 May 2017, you are able to claim Plant and Equipment depreciation if:

• the property you purchased is new and you have not lived in it;
• if you have purchased Plant and Equipment items to be installed in the property and you have not used them for personal use; or
• a company owns the property (not a SMSF or a Family Trust).

For properties purchased pre 9 May 2017, you are able to claim Plant and Equipment depreciation if:

• the property you purchased was used as a rental property some time during the 2016/2017 financial year;
• if you have purchased Plant and Equipment items to be installed in the property and you have not used them for personal use; or
• a company owns the property (not a SMSF or a Family Trust).

Commercial, industrial and rural properties are not affected by the Federal Budget 2017 changes to property depreciation.

Rural property owners can depreciate items including (but not limited to), buildings, sheds, yards, silos, horticultural plants etc. Fencing, water infrastructure and fodder storages are no longer claimable for properties purchased after 12 May 2015. Properties purchased prior to this date can still make these claims.

A tax depreciation schedule involves:

  • A full inspection of your property to identify all depreciable items
  • An historical construction cost estimate of the capital works allowances – building and structural improvements
  • Valuation of all Plant and Equipment items
  • Preparation of a report which is accepted by the ATO and summarises the depreciation allowances for the future years

FAQs

If you buy or own an income producing property (residential, commercial or rural), you should obtain a TDS if you wish to claim depreciation allowances. Schedules are prepared by qualified Quantity Surveying professionals to ensure that all possible deductions are identified and that ATO governing laws and requirements are met.

To compensate the taxpayer for the reduction in value of items used in the production of taxable income; assessed as building works, Plant and Equipment, and structural improvements.

Tax Depreciation can be claimed once a property becomes income producing, i.e. deriving an income from tenancy or business related income. Depreciation allowances are bound by ATO tax rulings and legislation, with specific key dates playing a significant part in the preparation of a TDS. Reference to the Australian Taxation Office legislation and tax rulings for depreciation are governed by the Income Tax Assessment Act 1997.

  1. Building – capital works (Division 43) (the bricks and mortar, this is the actual main structure)
  2. Structural improvements (Division 43) (this refers to external works such as pool, fencing, paving etc.)
  3. Plant and equipment (Division 40) (Typical Plant and Equipment items for a residential development include carpets, curtains, air conditioners etc.) The list of Plant and Equipment items for commercial and rural properties is extensive.

Basically our TDS are split into two sections:

  1. Capital works allowance - Capital works are those building elements that are integral to the building structure i.e. walls, floors, roofs etc. Residential investment properties constructed after 15 September 1987 are eligible to claim 2.5% of the original construction cost depending on the date the property was constructed. The ATO stipulates that "an appropriately qualified person" (TR 97/25) must be engaged to calculate original building costs if accurate original costs are unavailable. As Quantity Surveyors, HTW are appropriately qualified as outlined by the ATO. Note: Valuers, Accountants and Real Estate Agents are generally not appropriately qualified.
  2. Decline in value of Plant and Equipment - Articles of Plant and Equipment can be deducted at an increased rate compared to the capital works allowance. There are many items identified by the ATO which can be categorised as Plant and Equipment including (but not limited to) carpet, curtains, whitegoods, air-conditioners etc. If the residential property was purchased after 9 May 2017 or if the property is rented for the first time, under the new legislation, existing Plant and Equipment items are eligible for depreciation under specific circumstances.

Depreciation may be claimed on any property, either new or old. To claim depreciation allowance, the following conditions must be satisfied:

  1. The property must be owned by the taxpayer and;
  2. The property must be used for the purpose of producing assessable income, or be ready for use for that purpose.

Yes, depreciation allowances for common areas are apportioned according to unit entitlement.

Mandatory inspection of all properties, including the common areas in a unit complex, high-rise block of units, commercial unit block or industrial unit complex is carried out.

Depreciable items in common areas include but are not limited to fire hose reels, fire extinguisher, smoke detection and alarm system, hydrant pump, car parking, pool/spa equipment, gym fitout and equipment, etc.

If the residential investment property was purchased after 9 May 2017 or if the property is rented for the first time, under the new legislation, existing common area Plant and Equipment items are eligible for depreciation in specific circumstances.

Generally if you get the confirmation letter back to us today we would aim to carry out the inspection within the next few days, depending on access arrangements. The Quantity Surveyor would then prepare the report which could take another 7 days.

We carry out a detailed site inspection of your property to identify all of the Plant and Equipment items and assess capital works (building and structural improvements). From there, our Quantity Surveyor will prepare a Tax Depreciation Schedule which sets out the maximum depreciation and deduction allowances for the building, structural improvements and Plant and Equipment items. This information is incorporated into a full report that sets out the depreciation and deduction allowances for future years, which you can then simply pass on to your accountant for preparation of your tax return.

Yes. The cost of a Herron Todd White Tax Depreciate Schedule is tax deductible.