by Mish Daniel | Free Information
Assets suffer from depreciation due to wear and tear. So when you buy or invest in a property, you should calculate the decline in value of the assets over time. Doing this entitles you to some sizable tax deductions.
Unfortunately, many property owners – whether residential or commercial – remain uninformed regarding tax depreciation and are paying more tax than necessary. So, let’s look at what tax depreciation is, how soon you should get your tax depreciation schedule done, and which method is best for your situation.
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Without further ado, let’s take a closer look at just what tax depreciation is.
What Is Tax Depreciation?
Tax depreciation refers to a reduction in tax owed for an asset with a limited effective lifespan due to ageing and wear and tear. Essentially, you pay less tax for your property’s assets due to them losing value over time. To break it down even further, land is not a depreciating asset, but the windows and shutters of a home are. Tax depreciation is often one of the most significant deductions you can claim as a property owner.
There are two main categories of assets for which you can claim tax depreciation:
Capital work deductions
Capital works deductions (division 43) refer to your building’s structure and any fixed items such as windows, doors, bathtubs, etc. These deductions usually make up between 85-90% of your total tax depreciation claim.
Each asset and property type has different depreciation rates based on industry and construction date.
Plant and equipment depreciation
Plant and equipment assets (division 40) are easily removed from a property and include objects such as light fittings, hot water systems, blinds, ceiling fans, etc. You can claim depreciation deductions for thousands of different plant and equipment assets.
How to outline a tax depreciation schedule
A depreciation schedule is a report containing the details of all the assets for which you claim depreciation.
To outline a tax depreciation schedule, you need to determine the cost of the property and the cost of any assets in it. Hiring a quantity surveyor will help guarantee you receive the maximum deductions for a given property.
What Are The Different Depreciation Calculation Methods?
There are two primary methods the Australian Taxation Office (ATO) accepts:
#1. Diminishing Value Method
Using this method, the deductions are higher for the first claim and then diminish over time, meaning this is a good option if you’d like a more considerable amount of tax deducted straight away. The equation for this is:
Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)
Days held is the number of days you owned the asset in a given income year. So the equation of an asset worth 1000 dollars with an effective life of 5 years that you’ve held it for exactly one year would be:
10,000 (365365) (200% 5) =4000
Thus you can claim $4000 in the first year. For the second year, you would perform the same calculation with the base value as $6000, as your year 2 base value is the year 1 base value minus the amount claimed in that first year.
#2. Straight Line Depreciation Method (Prime Cost Method)
The prime cost method assumes the depreciation rate of an asset is constant over its life. The equation for this method is:
Base value × (days held ÷ 365) × (100% ÷ asset’s effective life)
So if we use the same example as above, the calculation would be:
10000 (365365) (100% 5) =2000
And you would claim $2000 for each of the 5 years, rather than calculating a new amount each year.
Reduction in Tax Deduction for Non-Taxable Use
No matter which method you use, a deduction of the depreciating value of an asset is taken into account each time it is used for non-taxable purposes. This means if an asset is used for private (non-taxable) purposes 25% of the time, then the final number as calculated above would be reduced by 25%.
What Affects My Depreciation Schedule?
This depends on several factors:
- The construction date of the property: commercial properties have varying cut-off dates regarding what you can claim and when. Cut-off dates have to do with the time a property was built and what legislation was in force then.
- The number and type of assets: For commercial properties like an office or a hotel, the bulk of the value will be in the concrete, cabinets, furniture, etc., while the remainder will be things like carpets, air conditioning, and lighting.
- Cost of construction: The more money spent on construction, the more deductions you get.
All these factors work together to determine how much depreciation you can claim each year.
What Is The Cost Of A Depreciation Schedule?
A depreciation schedule has a one-off cost that is 100% tax deductible and lasts for the life of the property (defined as 40 years). So once you’ve completed the report, you most likely won’t have to complete it for the same property again.
It doesn’t matter what type of property you have; you will be eligible for some form of a tax depreciation schedule.
So don’t delay in filing your tax depreciation schedule today. See our friends at MCG Quantity Surveyors to ensure that you get the most out of your claim.
If you need help buying or investing in commercial property, Revolve Commercial is a commercial property buyers agent, and we can help you make money. We also provide a mentorship program to help our clients learn about buying commercial property.
So stay informed and stay on track with only the best deals in commercial property with us, and contact us today for more information.