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Tax deductions for off plan property investment: how to appreciate depreciation

October 09, 2019

If you bought an off plan property as an investment, we’ve got some great news. In addition to enjoying the weekly rental income, you can also reduce your taxable income by claiming depreciation deductions. In fact, buying a new property means you can take advantage of the depreciation rules to claim higher deductions than you could if you bought an established property.

With the help of two off plan investors and the depreciation expertise of our property management team, we’ll show you how depreciation works to save you thousands of dollars every year.

What is depreciation?

Property depreciation is a tax concession that allows you to deduct the decline in value of the building structure, fixed items and eligible removable plant and equipment assets as they experience wear and tear over time.

The Australian Tax Office (ATO) recognises that all of these items lose value over their natural life. It has set out predetermined rules on just how much a property and the assets within it decrease in value. These vary depending on the item.

If you are an owner of a new off plan property, there are two main types of depreciation you can claim:

1. Capital works allowance

This covers claims for the structural element and any fixed items in the property. It includes:

  • Building materials like tiles and timber
  • External additions like an outdoor entertaining area, carport or balcony
  • Internal improvements like a new bathroom or renovated kitchen

Capital works deductions are claimable at a rate of 2.5% per year for the first forty years from when it was built. If you buy a property built in 1979, you’re out of luck. Buy a brand new off plan property, however, and you’ll still be claiming deductions in your dotage.

The capital works deduction in action:

Sarah is a patent lawyer in her late 30s. She exchanged on an off plan apartment in Turner three years ago. The apartment cost $400,000 and was completed two years later. Sarah has used the apartment as a rental property continuously since then.

Sarah’s annual capital works deduction is calculated at $400,000 (the cost of the apartment) x 2.5%. That gives her an annual deduction of $10,000, which reduces her taxable income by the same amount.

2. Plant and equipment depreciation

This can be claimed on any easily removable or mechanical items found within the property. Examples include:

  • Carpets
  • Split system air conditioners
  • Hot water systems
  • Curtains and blinds
  • Ovens

There’s more good news for purchasers of off plan properties here.

Firstly, new legislation from July 2017 means that investors can’t claim depreciation on second hand items that fall into this category. That means that if you bought a property that has been previously lived in, the carpets, appliances and fittings that were already there are second hand and not claimable. Your brand new off plan property, however, is filled with brand new items so you can claim the lot.

Secondly, there are two ways you can claim depreciation on plant and equipment. These are the diminishing value method and the prime cost method. We’ve tried to explain these as simply as we can, but if your eyes start to glaze over, don’t worry! Get in touch with your property manager and a specialist quantity surveyor and they’ll help you choose the right method for your circumstances.

The Prime Cost method assumes that your plant or equipment declines in value by the same amount every year over its effective life. The Diminishing Value method recognises that most items lose proportionately more value in the first few years, so the deductions start off higher and decrease as the item reaches the end of its life. This is ideal for easing the pain of a fresh property purchase.

The depreciation on plant and equipment deduction in action:

Charlie, a consultant with the Department of Defence, has been renting out his recently finished townhouse for the last year. In addition to claiming the capital works deduction, Charlie is also keen to claim depreciation on the carpet in the property. According to the ATO carpet has an effective life of ten years. Since the carpet cost Charlie $5,000, he can:

Use the diminishing value method, which nets him a deduction of $1000 in the first year, then $890 in the second year and dropping down to $444 by Year 6. As a new owner, this helps him maximise deductions at the point where his costs are likely to be highest.

Use the prime cost method, under which he can claim a deduction of $500 a year over the next decade.

Whichever method he chooses, depreciation offers a significant saving.

Claiming depreciation on common property

Of course, not all of the capital items or plant and equipment in the property belongs solely to you. As a strata title owner, you can claim anything within your apartment or townhouse (your ‘unit’) in full. For property owned in common, it gets a little more complicated.

Common property includes:

  • Commonly held capital works, such as fencing or roofs
  • Plant and equipment within common areas, such as gym equipment, fire equipment or HVAC systems

To claim a portion of these, you’ll need to know your entitlement within the strata plan, building unit plans and plan of subdivision. Check with your property manager if you’re not sure.

Property managers and depreciation

Tracking depreciation through a depreciation schedule is extremely important on a new off plan property. Your property manager can help with this. Independent has partnerships with quantity surveyors – the professionals that set up depreciation schedules.

We can arrange for a trusted quantity surveyor to access and asses your property and even deduct the surveyor’s fees from your rental income. Since quantity surveyors can generally find deductions that total more than their fees, this service is literally putting extra money in your pocket.

If you want to find out more about claiming depreciation and setting up a depreciation schedule, then get in contact with our property management team.

Independent is not a financial advisor. The information contained in this article is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before making any commitment of a legal or financial nature you should consider the appropriateness of the information having regard to your objectives, financial situation and needs and seek advice from a legal practitioner or financial or investment adviser.