As a property investor, a tax depreciation schedule is an often-overlooked tool that can help you maximise your returns and minimise your tax liability. This report outlines the tax deductions you can claim for the annual depreciation of your investment property.
In this comprehensive guide, we will explore what a tax depreciation schedule is, why you need one, what it includes, and how to get the most out of it.
So, let’s dive in.
What is Tax Depreciation for an Investment Property?
Tax depreciation is a non-cash deduction that allows property investors to claim a portion of the cost of their rental property over its useful life. It takes into account the wear and tear of the building and its assets and allows you to offset this decrease in value against your rental income, resulting in a significant tax benefit.
The Importance of a Tax Depreciation Schedule
Having a depreciation schedule is not just beneficial; it’s a necessity if you want to claim depreciation deductions on your property and its assets.
Using this comprehensive report, prepared in line with Australian Tax Office (ATO) legislation, is the only way to ensure you’re claiming the correct deductions. Without it, you simply can’t take advantage of the tax savings that come with depreciation.
Plus, a depreciation schedule makes the process easier and more efficient, as your accountant can directly apply the information from the schedule to your tax return, saving you time, effort, and money.
What is Included in a Depreciation Schedule?
A depreciation schedule includes various components to help you understand and claim the maximum tax deductions.
Here are the key elements typically included in a depreciation schedule:
Asset Inventory
A depreciation schedule provides a detailed inventory of all depreciable assets within your investment or rental property. This includes both the structural components relating to capital works deductions (Division 43) and plant and equipment depreciation (Division 40). The inventory lists each asset’s original value, effective life, and depreciation rate.
For example, plant and equipment assets are items that are easily removable or mechanical in nature from a residential investment property or commercial building. Examples of these assets include stoves, air conditioners, carpets, and light fittings.
The depreciation rates and effective lives of all ATO specified plant and equipment assets differ by asset and even by industry.
Depreciation Methods
The schedule presents both the prime cost and diminishing value methods of depreciation. The prime cost method allows for a consistent depreciation rate over the asset’s effective life, while the diminishing value method applies a higher depreciation rate in the early years, reflecting the plant and equipment asset’s faster rate of wear and tear.
Forecasted Deductions
A depreciation schedule provides a 40-year forecast of each depreciation deduction you can claim for your rental property. You can use this forecast to plan your tax strategy effectively and understand the long-term benefits of owning a depreciable asset.
Low-Value Pooling
Low-value pooling allows you to group low-cost and low-value assets together to accelerate their depreciation claims. An investment property depreciation schedule like this identifies assets that qualify for low-value pooling, enabling you to maximise each tax deduction in the earlier years of ownership.
Instant Asset Write-Off
The schedule also highlights assets that are eligible for the instant asset write-off, which allows you to claim an immediate deduction for assets costing less than a certain threshold. The write-off can provide significant tax benefits for small business owners.
Glossary of Terms
To help you navigate the terminology used throughout the schedule, a glossary of terms is included. This ensures that you have a clear understanding of the technical terms and concepts related to depreciation.
How to Get a Rental Property Depreciation Schedule
Obtaining a depreciation schedule for your investment property is a straightforward process. Here are the steps you need to follow:
Step 1: Engage a Quantity Surveyor
To ensure the accuracy and compliance of your depreciation schedule, it is recommended to engage a qualified quantity surveyor. Quantity surveyors are recognised by the ATO as professionals with the necessary skills to estimate construction costs, which is necessary to determine depreciation.
Step 2: Organise a Property Inspection
The quantity surveyor will conduct a thorough inspection of your property to identify all depreciable assets and gather the necessary information for the schedule. This may require coordination with your property manager or tenant to arrange access.
Step 3: Schedule Preparation
Based on the inspection findings, the quantity surveyor will prepare a comprehensive depreciation schedule tailored to your property. The schedule will include all relevant details, such as asset inventory, depreciation methods, and forecasted deductions.
Step 4: Delivery to Accountant
Once you receive the depreciation schedule, you can provide it to your accountant. They will apply the results from the schedule to your tax return, ensuring that you claim the maximum deductions available to you.
The Benefits of Tax Depreciation Schedules
| Benefits of Depreciation Schedules | Description |
| Maximising Tax Deductions | The primary benefit of a depreciation schedule is the ability to maximise your tax deductions. Accurate calculation and claiming of depreciation significantly reduce your taxable income, ultimately leading to less tax paid. This can result in substantial savings for property investors. |
| Improving Cash Flow | Depreciation schedules can also improve your cash flow. Claiming depreciation deductions effectively reduces your taxable income, which means you have more money in your pocket throughout the year. This extra cash flow can be reinvested in your property or used for other investment opportunities. |
| Planning for the Future | A depreciation schedule provides you with a long-term view of your property’s depreciation deductions. This perspective allows you to plan your tax strategy effectively and make informed decisions about your investment property. Understanding the future benefits of depreciation can help you maximise your returns and achieve your financial goals. |
The Cost of a Depreciation Schedule
The cost of a depreciation schedule can vary depending on the complexity of the property and the quantity surveyor you engage. Generally, the cost ranges from a few hundred dollars to around $800.
While a cheaper schedule may seem appealing, you need to consider the quality and accuracy of the report. Investing in a comprehensive and accurate depreciation schedule can yield higher deductions and long-term savings.
Additionally, it’s worth noting that the fees paid to a quantity surveyor for preparing a depreciation schedule are tax deductible, further enhancing the value of this investment.
Key Takeaways
- A depreciation schedule is a powerful tool for property investors, as it helps maximise tax deductions and improve cash flow.
- A comprehensive depreciation schedule allows you to claim the correct deductions in accordance with ATO regulations.
- Engaging a qualified quantity surveyor ensures accurate and compliant deductions.
- Investors should take advantage of this valuable tool to unlock the full potential of their investment properties.
Looking to maximise your tax deductions with a depreciation schedule? While KNS Accountants and Business Advisors don’t provide depreciation schedules directly, we can work closely with a qualified quantity surveyor to ensure you get the most out of your investment property.
Contact us today to learn how we can assist you in optimising your investment property’s financial performance.
Frequently Asked Questions about Depreciation Schedules
Are Depreciation Schedules Only for New Properties?
No, depreciation schedules are beneficial for both new and older properties. While new properties generally have higher claims due to their higher construction costs, older properties still have benefits.
However, you should note that law changes in 2017 limit claims on second-hand depreciation assets for properties acquired after May 9, 2017.
Despite this limitation, a depreciation schedule covers all deductions available over the lifetime of a property, regardless of its age, and can still provide significant tax benefits for older properties.
Can My Accountant Take Care of Depreciation Claims?
While accountants play a crucial role in managing your tax affairs, quantity surveyors specialise in estimating construction costs and determining depreciation values.
The ATO recognises quantity surveyors as professionals with the necessary expertise to accurately assess and calculate depreciation.
Collaborating with a quantity surveyor ensures that your claims are maximised and compliant with ATO regulations.
Do I Need a New Depreciation Schedule Every Year?
No, you only need one depreciation schedule per investment property. However, it is recommended to obtain a depreciation schedule soon after settlement to ensure that you claim the maximum deductions right from the start.
If you make significant changes to your property, such as renovations or additions, you may need to update your schedule to reflect these changes.
