What is Tax Depreciation

Under Income Tax law you are allowed to claim certain deductions for expenditure incurred in producing assessable income. Generally the value of capital assets (such as investment property buildings, plant, and equipment) decline over their effective lives. Because of this, the cost of capital assets used in gaining assessable income (property rent) can be written off over the effective life of each asset as tax deductions.

Houspect can assess the cost and value of capital items and prepare a schedule for you which details the maximum tax deduction available. All you then need to do is provide the Houspect Depreciation Report to your tax accountant or tax adviser. They will then include the relevant information into your tax return.

The benefit to you is that you can reduce your tax payable in each year own an income producing asset.

Examples of effective lives for plant and equipment

NOTE: There are 100's of depreciable items of plant and equipment that may be found in residential property.

Capital works deductions

You can also deduct certain kinds of construction expenditure for properties conducted after the 18th May, 1985. In the case of residential properties, the deduction would generally be spread over a period of 25 or 40 years. These are referred to as capital works deductions.

Examples of construction expenditure:

• A building or extension (i.e. adding a room, garage, patio or pergola)
• Alterations (removing or adding internal walls)
• Structural improvements (i.e. adding a gazebo, carport, sealed driveway, retaining wall or fence)

The amount of the deduction you can claim depends on the type of construction and the date construction started. If the type of construction qualifies the following table shows the rates of deduction available.

Example of a depreciation report at work

On 1 March 2007 Meg purchased a rental property for $300,000 and immediately rented it out. Meg obtained a report from a quantity surveyor stating:

• the construction of the property commenced in February 2003
• the property was a residential townhouse
• construction was completed in November 2003
• the townhouse was built by a developer
• the estimated cost of construction was $200,000

Meg would be able to claim a capital works deduction in her 2007 return for her rental property based on the estimate of the construction costs she obtained from the quantity surveyor. However, Meg could only claim a deduction for the part of the year her property was available for rent (1 March 2007 to 30 June 2007). The rate of deduction she could claim was 2.5% as as construction of her residential property started after 15 September 1987.

He annual capital works deduction was calculated as follows:

$200,000 x 2.5% = $5,000

As the property was only used for income producing purposes for 122 days in 2007, her 2007 claim was calculated as follows:

$5,000 x 122/365 = $1,671

Contact Houspect Building Inspections for more information