What Are Depreciation Expenses?
Depreciation Expenses are what the ATO allows you to claim as deductions for rental property investment purchases. You can’t claim the value of the investment property but you can claim the decline in value of the building and assets; these are called Depreciation Expenses.
Most property investors these days have heard of Tax Depreciation Schedules and know roughly what they do – they set out year by year the depreciation expenses you can claim on your rental property. And most investors know that the people most qualified to put together a Depreciation Schedule showing depreciation expenses are Quantity Surveyors. (Some investors also know that we are the only national company that uses Quantity Surveyors on the ground.)
How Depreciation Expenses are Recorded
But what about the document itself? How do you make sense of the depreciation expenses shown in a Depreciation Schedule?
If you use an accountant to do your tax, you might not have to. You’ll just give them the Depreciation Schedule and scurry off. But what if you are one of those people who does their own tax? Or likes to know how things work?
The first thing to know is that there is no set format for a Depreciation Schedule. There are as many different formats as there are companies doing them. Some are good, and some are lousy. Some are very brief and incomplete, some are too complex. We like to think ours are just right – accountants must also because most of our work comes from accountants. Those accountants know that when they get our Depreciation Schedule they won’t have to fix it (and charge their clients for the time).
Depreciation Expenses Related to Construction
A good Depreciation Schedule will have the construction cost of the building when it was built (if eligible) noted very clearly. Residential buildings, and often renovations, depreciate at 2.5%pa. The first year is treated pro-rata, but for each year after that, 2.5% of the original construction cost will be claimed until the building is written-off. If the building was constructed in, say, 2000, it will all be written-off by 2040 (40 years x 2.5% = 100%).
Depreciation Expenses Related to Assets
The next type of depreciation expense on your Depreciation Schedule is the Assets. These are the things that depreciate more slowly than the building e.g. appliances, floor coverings, curtains/blinds, air con, hot water units. Our Quantity Surveyors work out a value of these items as of when you start renting out the property. If the rental property is brand new, this will be a brand new value. If the property is old, it will be a second hand value.
Low Value Depreciation Expenses (Low Value Pool)
Depreciation expenses for Assets that have a value below $300 are claimed in full in the first year of the Depreciation Schedule. Assets that are valued between $300 and $1,000 can go into a thing called the Low Value Pool. (This Pool is a tax thing – nothing is going to get wet.) Depreciation on assets in the Low Value Pool get claimed at 18.75% in the first year and then at 37% per year after that on the diminishing total. Then there are the Assets in a depreciation Schedule worth over $1,000. They get claimed a bit more slowly until their value falls below $1,000. They can then go into the Low Value Pool.
That is the basics. You might hear talk of the ‘two methods’ of claiming depreciation – Prime Cost and Diminishing Value. Your accountant will advise you on which one best suits your situation. Our Depreciation Schedules of course provide both methods, but you would expect that from us.