Tax Depreciation

(Simple example) The Tax ACT states that if you purchase an asset (rental property) for the sole purpose of earning a living then you are allowed, under current legislation, to claim for the amount of wear and tear (depreciation) as a deduction against any income generated. These deductions essentially reduce your tax liability on assessable income and allows you to claim back money that would otherwise go to the tax man.

In residential property there are two types of tax depreciation allowance.

Each are handled differently, as they both has different rules and regulations that govern how their deductions can be claimed. The building capital allowance is a deduction available for the structural element of the property and was introduced in 1985. Buildings built prior to that does not qualify initially for the allowance. Although renovations and extensions (structural improvements) built after that year are eligible for tax deductions. Depending on when the building was built you can either claim 2.5% or 4% of the historical building capital cost (shown in the table below).

The plant assets are items contained within the building that do not form part of the structure. Items such as carpets, air conditioning, fans, white goods, hot water units and furniture attract a higher depreciation rate than the building capital. It is a common mistake with investors that depreciation is only available on new property, but in fact these plant asset items are assessed at every purchase and re-valued as an apportionment of the new purchase price.

A simple 1st year example of the benefits of claiming tax depreciation deductions are provided in the table below.

Tax Depreciation Cont.