As the financial year comes to a close, investment property owners will be examining their eligible tax deductions. Associate Director of Turner & Townsend, Andrew Park, sheds some light on the complex topic of tax depreciation.

What is tax depreciation?

‘Depreciation is a general accounting term that describes how an asset declines in value over time,’ Mr Park said.

‘Owners of rental properties, such as Defence Housing Australia (DHA) investment properties, are entitled to reduce their taxable income by claiming depreciation on their property.

‘The tax deduction is intended to compensate the taxpayer for the costs associated with wear and tear on a property and encourage investment in rental properties,’ he said. 

Tax depreciation should be included in the calculation of a property’s income producing value as an investment.

What are the benefits of claiming tax depreciation?

Income producing properties can have substantial taxation benefits.

‘Claiming tax depreciation on an investment property will reduce the taxable income for a taxpayer.

'This is particularly beneficial in the first few years when deductions are at their maximum level,' Mr Park said.  

What deductions can be made?

Deductions are calculated based on Division’s 40 and 43 of the Income Tax Assessment Acts.

‘Division 40 allows deductions for plant and equipment such as ovens, cook tops, heating, air-conditioning, hot water units, carpet, vinyl, water tanks and other items,’ Mr Park said.

Deductions are based on the purchase cost of these items.

‘Division 43 allows for a capital allowance deduction for the construction costs of the property.

‘The costs in this division are based on the initial construction costs of the property excluding site preparation, landscaping and developer's profit,’ he said.

For more information on what rental property deductions can be claimed, click here to read this month’s Industry insight from the Australian Taxation Office (ATO). 

How is depreciation calculated?

The ATO provides two acceptable methods for calculating the decline in value of a depreciating asset:

1. Prime Cost method

This method assumes that the value of a depreciating asset decreases uniformly over its effective life.

2. Diminishing Value method

This method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time. Put simply, the asset wears down more in its early life, allowing for higher depreciation write offs in the beginning and less write offs towards the end of its life.

What is a tax depreciation schedule?

‘A tax depreciation schedule is a report that provides an assessment of the tax depreciation available on an income producing property,’ Mr Park said. 

This type of report may be provided to a property investor's accountant who can determine which scenario (depreciation method) best suits their financial situation.

‘Tax depreciation schedules must be prepared in accordance with the Income Tax Assessment Acts, ATO determinations, rulings and applicable case law interpretations,’ Mr Park said.

‘This is a complex area of tax which is constantly changing, and up to date tax legislation, determinations and rulings must be applied.

‘As such, depreciation schedules are best arranged by quantity surveyors with experience in their preparation,’ he said.

How are tax depreciation schedules for Defence Housing Australia (DHA) properties prepared?

A free tax-compliant depreciation schedule is provided upon settlement of each DHA investment property. Each depreciation schedule is specifically tailored to the property details.

DHA depreciation schedules contain the following information:

• a statement of basis for the preparation of the report 
• the methodology of the preparation of the report
• a schedule of depreciation based on Prime Cost and Diminishing Value methods
• low value pooled items noted separately
• comparative Prime Cost versus Diminishing Value depreciation, and
• capital allowance and structural improvements allowances.

This information allows the property owner and their tax advisor to understand the basis for the claim in a clear and concise manner.

Indicative depreciation schedules are available for most properties listed for sale on the DHA website. These can be accessed by clicking on the 'view depreciation schedule' link when you view the property details. You can also access these by contacting your sales consultant.

About Andrew Park and Turner & Townsend Andrew has over 16 years experience as a quantity surveyor, starting his career in Canberra. During this time Andrew worked on major projects in the Australian capital with high profile clients including Foreign Affairs and Trade, the National Film and Sound Archive and Treasury. Andrew has recently completed a Bachelor of Laws from the Australian National University which provides a unique ability to interpret ATO legislation and rulings affecting tax depreciation. Andrew also holds a Bachelor of Construction Management and Economics with Honours. Andrew is currently an Associate Director with Turner & Townsend in their Cairns office. Turner & Townsend is a global consultancy with experienced quantity surveyors, project managers and property consultants, providing services Australia wide.  All Turner & Townsend quantity surveyors are degree qualified and have extensive experience producing clear and accurate tax depreciation schedules. All schedules are prepared in accordance with ATO legislation, determinations and rulings. For further information contact: Andrew Park, Associate Director Tel: +61 (0)7 4031 2088 E: andrew.park@turntown.com W: Turner and Townsend

Disclaimer: This information has been sourced from Turner and Townsend. DHA investors retain some responsibilities and risks. Investors should seek professional and independent advice.