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About Depreciation

What is Depreciation

According to the tax office, under income tax law, you are allowed to claim deductions for expenses incurred in earning assessable income, eg. rent. The cost associated with the acquisition of capital assets, which provide benefit over their "effective life" may be written off over a period of time as tax deductions and this is essentially known as depreciation.

What is a Tax Depreciation Schedule?

A Tax Depreciation Schedule is a professionally produced document highlighting items of plant, equipment and capital costs that may be depreciated. It incorporates the value of each depreciable item, including delivery costs, installation costs and the cost associated with bringing the plant into full operation.

Major traps people fall into:

  • Not claiming depreciation because they think their property is too old.
  • Claiming depreciable items as a repair (deduction).

Are only new properties depreciable?

There is a common misconception that only new properties are eligible for depreciation. This is not the case. Whilst it is true that new properties attract higher returns of depreciation, older properties can produce attractive returns also. In fact, in 99% of cases, a deduction of some tangible value is attainable.

Are repairs allowed as a deduction?

In assessing whether a repair is an allowable deduction, the ATO looks at whether the claim relates to an actual repair, or improvement. The definition of repairs is an expense incurred in restoring an income producing asset to the condition it was in when it first became income producing and hence, can be claimed in the year the remedial works were undertaken. An improvement on the other hand is not claimable as a direct deduction, however may be depreciated under the capital allowance deduction over the course of 40 years at a rate of 2.50% per annum.

Typical items considered as repairs include:

  • Replacing broken windows.
  • Plumbing maintenance.
  • Repairs to electrical appliances.

Expenses considered as improvements include:

  • Insulating the house.
  • Painting, alterations and additions.

What items are non-depreciable at accelerated rates?

In rental properties, there are items that are considered to be an integral part of the "setting", and hence do not qualify for depreciation, as separate items of plant and equipment. However, they can be depreciated as part of the capital works. Some of these include:

  • Built in kitchen cupboards
  • Reticulation pipework
  • Roller door shutters
  • Clothes hoists
  • Rooftop ventilators and skylights
  • Door and window fittings
  • Security doors and screens which are
  • Garages and portable sheds permanently fixed to building
  • Sinks, tubs and baths
  • Floor and wall tiles
  • Driveways and paths
  • Wash basins and toilets
  • Inground swimming pools, saunas and spas

Some of the most common items allowed to be depreciated at accelerated rates. Include the following (this list is not exhaustive):

  • Window coverings, including blinds and curtains.
  • Carpet and Vinyl floor coverings.
  • Hot water units.
  • Whitegoods, such as microwaves, washing machines, refrigerators, etc., if they are owned by the property owner.
  • Electrical appliances.
  • Building services, ie. mechanical, electrical, fire, hydraulics & lifts.

Other important points

The other main component of depreciation includes the construction cost, or otherwise known as the capital works deduction. The construction cost includes costs associated with design fees, building approval fees and excavation costs.

All costs associated with land acquisition, demolition of existing structures, site preparation, soft landscaping, and other items already allowed for as a deduction.