Tax Depreciation Schedules

Who is Quantum QS?

Quantum QS is a professional independent practice of consulting Quantity Surveyors and Construction Cost Consultants providing a full range of property, building and construction related services. At Quantum QS, we pride ourselves on the diversity and professionalism of our people, their skills and experience. We believe their commitment to our clients has helped develop our organisation to become one of the foremost cost and technical quantity surveying firms in Australia.

What is a Quantity Surveyor?

Quantity Surveyors (QS) are professionals that work within the construction industry concerned predominantly with building costs during the phases of any projects inception, construction, holding and disposal stages. Simply put, they are building consultants namely providing priced estimates throughout the holistic life cycle of a building or built structure. QS’s provide these services through a qualification gained following formal education, specific training and experience that provides a general set of skills that are then applied to a diverse variety of problems relating to costs and contracts on projects and built environments. Many then choose to specialise in certain niche markets. For further details refer to the link below: http://www.aiqs.com.au

How can Quantum QS help you?

Quantum QS offers a vast array of Quantity Surveying services and specialises in the preparation of Tax Depreciation Schedules. At present, we are one of a few specialist firms in this area and we are endeavouring to become an Industry leader, offering both maximum gains for our clients at minimum outlay. Quantum QS works closely with financiers, property developers, accountants, real estate agents and private clients to ensure maximum returns are achieved. We service all postcodes within Australia.

What is Depreciation?

Depreciation is the process of devaluing assets as they decrease in value over their lifetime until reaching the end of their useful life. The terminology associated with depreciation is a decreasing monetary amount of an asset over time. If the asset is used to derive or produce an income, then a depreciation value may be claimed as a tax deduction. This deduction amount will then be adopted by the tax payer to offset against their total assessable income allowing the tax payer to reduce the amount of taxation payable.

What is Tax Depreciation Schedule?

A Tax Depreciation Schedule is a planned procedural tabled report, predominantly compiled by an ATO Compliant Licenced Professional such as a Quantity Surveyor acting as a tax agent, detailing all depreciable components of an investment property regardless of use whether residential or commercial by nature. Like a shopping list, it outlines items of the investment's various depreciable items, the amount of wear left in them (based on current Tax Rulings Effective Life). This may then be used to as a deduction against assessable income allowing the owners to reduce the amount of taxation payable against their assessable income. Depreciation is a term that describes the decreasing value of an asset over time. If that asset is used to earn an income then depreciation may be claimed as a tax deduction.

What is Property Tax Depreciation?

Tax depreciation can be claimed on a variety of items from laptops and cars including properties regardless of their use whether residential or commercial investment. As long as they are deemed to be classified as producing an income and are built and completed within the phased calendar periods set down by Australian Taxation Office (ATO - refer to time horizon graph as below) and its many other guidelines. The Income Tax Assessment Act 1997 allows owners of both residential and commercial investment properties to claim annual deductions for depreciation on:

  • Capital Works Allowance and Structural Improvements (the main building structure and any improvements to land outside and external of the main building, referred to as Division 43.
  • Depreciating Assets referred to as Plant and Equipment (includes items such as window coverings, floor coverings, and kitchen appliance and so on, referred to as Division 40).
  • In the case of an Owners Corporation or a Body Corporate scenario, dependant on which State the properties may reside; an apportionment of the common areas and common plant and equipment should be provided by the registered tax agent quantity surveyor.

What are Depreciating Assets formerly known as Plant and Equipment (Division 40?)

Legislation allows all depreciating assets to be given a new effective life from settlement date and is depreciated at various rates generally ranging between 5% - 20% compared to the Capital Allowance on building depreciation rate of 2.5% - 4% depending on construction date and the usage of the building.

Depreciating assets grouped as plant are pre-defined by strict ATO legislation and guidelines; the rate of depreciation is pre-determined by the Commissioner of Taxation, through Taxation Rulings and guidelines published by the ATO which govern the industries and the effective lives associated with these items. This is available for all investment properties, both new or second hand regardless of age.

Some examples include but are not limited to the items set down as below:

  • Air-conditioning split or ducted/ ventilation exhaust systems
  • Fire installations (smoke detectors, fire panel, hose reels etc.)
  • Floor coverings; carpets, vinyl, timber floating board
  • Window coverings; curtains & blinds
  • Kitchen appliances; cooktop, oven, range-hood, dishwasher
  • Laundry appliances; hot water unit, dryer, washing machine
  • Electrical switchgear non-residential properties and so on

What is Capital Allowance also referred to as a Building Write-off (Division 43?)

This deduction is based on the historical construction costs of the property which may include surveying, engineering, architectural and building fees. Note that this cost does not include the land acquisition cost and site preparation or soft landscaping.

If you are unable to contact the property's original builder, or he is unwilling to provide you with this information and the historical construction costs of the building, the ATO will accept an estimate prepared by a quantity surveyor (IT2640). The qualified quantity surveyor will produce an adjusted value formerly known as written down value (WDV). Estimates prepared by valuers, real estate agents, accountants or solicitors are not acceptable (DT 94/83).

In order for residential properties to qualify the properties have had to be built after 18 July 1985 and for commercial properties 20 July 1982. The rate of depreciation is fixed over either 25 years or 40 years’ time horizon determined by Legislation set by the ATO.

Decline in value or Write-off percentage depends on type of building and date of construction. Two rates of write-off apply 2.5% over 25 years generally for residential properties or 4.0% over 40 years for manufacturing & short-term travellers’ accommodation occupiers depending on date of construction, for more details refer to Quantum QS time line chart.

Does my Building Qualify for a Capital Allowance Deduction or simply Depreciation?

Refer to Quantum QS’s time line chart to determine whether your buildings qualify and if it so what the percentage write-off allowance is deemed at! An example to interpret our horizon chart is as easy as, say for example your investment property is a residential building, then go to the type of building usage or type of building left hand side of the chart to “residential” then move horizontally across to reference; the commencement of construction must have occurred after the period of 18th July 1985 to the present date, the start date for any residential building is from the 18th July 1985. Therefore, anything Pre-1985 does not qualify. However, one can also see if the commencement of the construction period occurred post 18th July 1985 through to 16th September 1987 then the depreciation rate for the main building component ‘classified as Division 43’ is set at 4.00%. Moreover, any construction commencement for residential type buildings from the period of 16th September 1987 to the present date is then set at 2.50%.

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How many different types of Tax Depreciation Options are available to claim?

A property investor may claim two distinct types of depreciation on their property: Depreciating Assets formerly known as plant and equipment/articles (Division 40 formerly division 42):

These items are basically those that can be ‘easily’ removed from the property in comparison to items that are permanently fixed into the structure of the building. Such as; appliances, floor covering and window blinds.

Building Allowance (Division 43): This is based on historical building costs and includes the substructure, superstructure and roofing etc. or better known as bricks and mortar, walls and floors.

Why is there Tax Depreciation?

Depreciation is a term that describes the decreasing value of an asset over time. If that asset is generated to produce an income then depreciation may be claimed as a tax deduction. Moreover, it is a capital allowances for capital expenditure incurred by the taxpayer on depreciating assets, it provides the tax payer with some form of compensation for the loss in value of depreciating assets formerly known as plant and articles due to obsolescence including wear and tear.

Tax depreciation on a residential or commercial investment property is a deduction against assessable income allowing the owner to reduce the amount of taxation payable.

What is Plant? What is Completeness Test? What is Functional Test? What Is Affixation Test?

Yarmouth v France (1887) defined plant as: "Plant is the apparatus used to carry on a business; not the trading stock but the goods and chattels, whether fixed or moveable, which are kept for permanent employment in the business."

  • No legal definition,
  • Case law, Taxation Rulings,
  • ATO’s Effective Life Tables (A&B) on Industries Items,
  • Indications and various tests that can be performed to ascertain if an item is plant include but not restricted to the following:-
    • Completeness test

    • Whether the building would be complete for the carrying on of the activity that is to be carried on within it without that item.
    • Functional test

    • "in the nature of a tool",
    • It is a single unit of plant and not a collection of bricks, mortar paint, timber etc.
    • It is part of the manufacturing process.
    • Affixation test

    • The law of fixtures originates from the rudimentary principle that anything affixed to land is a fixture which vests with the owner of the land. The law later came to have regard to the objective intention of the affixer in determining whether an item was a fixture or a chattel. For the purpose of deriving objective intention, the Courts historically applied tests premised on the purpose for which the item was affixed to the property and the degree of annexation.
  • Depends on the facts of each asset.

What is the main difference between Depreciating Assets & Capital Allowance?

Depreciating Assets formerly known as Plant and Equipment/Articles (Division 40 - formerly Division 42) Legislation allows all depreciating assets to be given a new effective life from settlement date and is depreciated at various rates generally ranging between 5% - 20% compared to the Capital Allowance on building depreciation rate of 2.5% - 4% depending on construction date and use of the building.

Depreciating assets grouped as plant are pre-defined by strict ATO legislation and guidelines; the rate of depreciation is pre-determined by the Commissioner of Taxation, through Taxation Rulings and guidelines published by the ATO which govern the industries and the effective lives associated with these items. This is available for all investment properties, both new or second hand regardless of age.

Example items are as below:

  • Air-conditioning split or ducted/ ventilation exhaust systems
  • Fire installations (smoke detectors, fire panel, hose reels etc.)
  • Floor coverings; carpets, vinyl, timber floating board
  • Window coverings; curtains & blinds
  • Kitchen appliances; cooktop, oven, range-hood, dishwasher
  • Laundry appliances; hot water unit, dryer, washing machine
  • Electrical switchgear non-residential properties

Capital Allowance (Division 43)

This deduction is based on the historical construction costs of the property which may include surveying, engineering, architectural and building fees. NOTE that this cost does not include the land acquisition cost and site preparation or soft landscaping. For residential property to qualify, the property has to be built after 18 July 1985 and commercial properties 20 July 1982. The rate of depreciation is fixed over either 25 or 40 years determined by Legislation set by ATO.

Write-off percentage depends on type of building and date of construction. Two rates of write-off apply 2.5% over 25 years generally for residential properties or 4.0% over 40 years for manufacturing & short-term travellers’ accommodation occupiers depending on date of construction, for more details refer to Quantum QS time line chart.

How many methods are there to Depreciate Plant and Equipment items?

There are two different methods for Depreciating Assets formerly known as Plant & Articles Items;

  1. Prime Cost Method / Straight Line Depreciation and,
  2. Diminishing Returns Method / Accelerated Depreciation

Prime Cost Method / Straight Line Depreciation

The Prime Cost Method is the most simplistic method and lets us assume the value of an Oven, for example, decreases by the same dollar amount each year of its effective life.

To calculate the annual deduction, take the total cost of the asset, multiply this by the number of days held, over 365 and then multiply by 100 percent over the assets effective life.

For example, if our Oven is valued at $2,000 with an effective life of 10 years and used wholly for the purposes of generating income for the full year it would provide the tax payer an annual deduction of $200 over 10 years = $2000 in total [($2,000 x 365/365 x 100 %) / 10 years].

Properties settled pre 10th May 2006.

(2) Diminishing Returns Method / Accelerated Depreciation

The Diminishing Returns Method assumes the decline in an assets value each year is in constant proportion with the remaining value. This means property investors receive a greater deduction in the early years of ownership, and a diminishing deduction in subsequent years.

For example, our same Oven valued at $2000, held for the full 365 calendar days in the financial year, would provide the tax payer an annual deduction in year one of $300 and year 2 $265.00 Year 3 $217.00 year 4 $184.00 year 5 $157.00 and the remaining balance of $887 over the remaining 5 years totalling $2000 in 10 years ($2000 x 365/365 x 150 percent/10 years).

Properties settled pre 10th May 2006.

Properties settled post 10th May 2006.

Is Tax Depreciation available only on new properties?

Quite simply NO. Investment properties do not have to be new as both new and old properties will attract some depreciation deductions.

Although properties built prior to 1985 do not qualify for the Capital Allowance component of depreciation, all improvements and renovations made to the property since its construction, however minor, can be depreciated from the date they were completed. This can include major renovations such as extensions, garages, carports and pergolas to more modest improvements such as updated kitchens and bathrooms, repainting, and new floor and window coverings.

Many of our clients were surprised and extremely delighted at the amount of depreciation that was available in their older properties. Do not get caught up in the common myth that older properties will attract no claim.

Can depreciation be claimed on renovations completed by previous owners?

Although these Renovations Works may not have been commissioned by yourself, there may be further depreciation deductions available to your claim. Everything in the property that is part of a previous renovation will be assessed and costs estimated accordingly by our quantity surveyors. Some of these items that a layman would not know may include new electrical wiring, fitments, plumbing, water-proofing and so on. A point to remember is for capital improvements to qualify for the Division 43 building write-off allowance, they must have commenced construction within the appropriate Division 43 time periods.

Our reports our complied by qualified quantity surveyors who are deemed as experts in construction costs. This is the difference that provides Quantum QS a comparative advantage over their competitors. When you have your schedules prepared by Quantum QS we have the know-how to identify these works and appropriately cost those to its historic values in return will maximise the claim.

Remember before you commission another provider to prepare a schedule, check to see if they have these capabilities and expertise to provide these costing; for example if a historic cost is assessed at $40,000 as renovations and meets the qualifying periods of works carried out this alone could boost the claim by in access of $1,000.00 per year over and above other entitled deductibles. This is our edge 'YOU WILL APPRECIATE WHAT WE DEPRECIATE'.

A thorough site inspection is undertaken on your property and further Local Authority searches can also expose previous renovations carried out on the property. Always consult a Quantity Surveyor expert about your entitlements.

This is one avenue of maximising the depreciation available in your investment property which may improve your cash flow position each financial year.

I bought my property a number of years ago. Can I still make a claim?

You can adjust/amend previously lodged tax returns in the event that a property owner has not claimed or maximised their tax depreciation deductions. Generally these amendments are for two previous financial year lodged returns. Contact your Tax Accountant or ATO for further details and information relating to this adjustment in claim.

When can I start claiming my Depreciation?

The decline in value commences from settlement date for any income producing investment property. However if you have previously resided in the property yourself, then the commencement date for the property will be the first available income producing day. You tax advisor can provide further details.

Does Depreciation affect Capital Gains Tax?

Claiming the complete depreciation allowances on your investment property does not adversely affect your capital gains tax position. You can claim all deductions and CGT rulings remain the same.

You will, however, be required to add your capital allowance deductions to your capital gain when and if you decide to sell your investment. Note that if you hold the property for longer than 12 months there may be entitlements to the CGT discount. Moreover, the tax payer will be required to add capital allowance deductions to the capital gain whether or not the tax payers have actually claimed the same. Your tax advisor can provide further details

A key point is that the additional cash flow available from your depreciation can be utilised for additional repayments, adding value to your asset or as a guard against future vacancy.

Why do you need to conduct an Inspection of my property?

It is very important that we undertake a full inspection of your property for a number of reasons:

  • Quantum QS Pty Ltd prides itself on operating under strict ATO and Australian Institute of Quantity Surveyors (AIQS) guidelines. The Australian Institute of Quantity Surveyors (AIQS) Code of Practice stipulates that site inspections are necessary to satisfy ATO requirements In order to produce and certify a legitimate Tax Depreciation Schedule.
  • A physical site inspection provides us the ability to identify, and assign a value to, every depreciable component of your investment property.
  • A physical site inspection provides us the ability to identify all improvements and renovations to the property, some of which you may not even be aware of.

Companies or individuals who prepare Tax Depreciation Schedules without conducting a full property site inspection simply cannot certify and claim they can maximise the claim and state that the calculations provided are legitimate and accurate. Why risk an inferior Tax Depreciation Schedule that ultimately may not withstand an ATO audit. Our filed notes and photographs taken on site along with other documentation details in our compilation of the report can be used as evidence in the event of an audit.

What is low-value pooling?

From July 2001 the low-value pool was introduced by the ATO into the Australian tax system known as the uniform capital allowance (UCA) rule. This enables low-cost assets (assets which when acquired have a total cost greater than $300 and less than $1,000) to be depreciated at 18.75% on the diminishing value basis for the first year of ownership. From the second year 37.5% will apply. Items that have a low –value less than $300 have an immediate write off in the first year as long as it is not part of a set.

At a glance the low-value pooling method appears to be an effective rule allowing an increased depreciation deduction to most investment property owners as not many assets are able to be depreciated at such a rapid rate and is an extremely popular method. Ultimately the tax payer can choose whether or not to adopt this methodology in the report. If they choose this method then all other low-value assets acquired from that year onwards must also be adopted in that pool.

Can I choose low-value pooling method?

A taxpayer can choose whether or not to put low-cost assets into a low-value pool, but if in an income year (tax year) they choose to do so, then all other low-cost assets acquired from that year onwards must also be placed into the pooling. Consequently, if those low-value pool assets are destroyed say in year two or three then the tax payer is unable to write-off the remaining amounts. These may have significance with Hotel, Club and Pub type properties as such assets generally have a high turnover. Let’s assume a Pub has planned a retro-fit for 2 years, it may be expedient to depreciate the assets outside of the pool as assets within the pool cannot be written-off on demolition or destruction.

Determining if the item is not part of a Set under low-value pool items less than $300.00?

Whether items form a set or not need to be determined by analysing it case by case. The ATO states that items may be regarded as a set if they are:

  • dependent on each other,
  • marketed as a set, or
  • designed and intended to be used together.

NOTE that it is the cost of a set of assets you acquire in the income year that must not exceed $300. You cannot avoid the test by buying parts of a set separately.

For examples refer to the link below:

http://www.ato.gov.au/Individuals/content.asp?doc=/content/66033.htm&page=28&H28

Can I claim Depreciation on my new Kitchen?

YES. However the majority of the cost of the new Kitchen will be depreciating as a Capital Allowance. Hence Division 43 rates apply over a 40 year effective life for residential properties. Consequently, most new Kitchens include new depreciating assets formerly known as plant and articles items such as new ovens, cooktops, range-hood and dishwasher etc. installed and these are identified as Division 40 items which will attract a lesser effective life that will increase the depreciable rate.

Can I claim Depreciation on Landscaping?

Only if it’s deemed and assessed by our quantity surveyors as external works within the boundaries of the subject matter property and that these works occurred after 27 February 1992. These are known and referred to as Structural Improvements to the land or as hard landscaping and as such would include items like concrete driveway, pathways paved or concrete, fencing, retaining walls etc. These will be depreciated as Capital Allowance over a 40 year period however.

Soft landscaping cannot be depreciate and is therefore excluded from the cost. These items for example would include trees, plants, turf, and soil as a resultant should be deducted from the overall total costs.

Can I claim Depreciation on my Swimming Pool?

Yes. However the majority of the cost will be tagged as a Capital Allowance. Hence Division 43 rates apply over a 40 year effective life for residential properties. Although many swimming pools have depreciating assets formerly known as plant and articles items associated with the pool which may include items such as pool filters, pool chlorinator, pool heater, and pool cleaning equipment that will attract a shorter effective life which in turn will ultimately increase the depreciable rate.

What are the differences between Commercial & Residential Property Depreciation?

There are mainly three differences on Depreciating Commercial Property. In short they are:

  1. A commercial building can be occupied be the owner in which they can still claim depreciation unlike a residential properties,
  2. Older buildings may qualify for the building allowance on the basis of its completion dates refer to our time line chart.
  3. Additional deductable items qualify based on the industry type and also the effective life components vary on most items.

As a result commercial properties in comparison to residential properties attract a high increased depreciation allowance based on the above collected variants.

Why Does Property Tax Depreciation Only last 25 or 40 years?

The rate of depreciation is fixed over either 25 years or 40 years determined by Legislation that is set by ATO.

Write-off percentage depends on type and use of building along with the date of construction. No deduction is available unless the building construction is complete. These two rates of write-off apply:

2.5% over 25 years generally for residential properties and,

4.0% over 40 years for manufacturing & short-term travellers’ accommodation occupiers depending on date of construction.

For more details refer to Quantum QS time line chart.

What’s included in a Tax Depreciation Schedule Report?

Quantum QS’s Tax Depreciation Schedules will include the following:

  • Depreciation calculations for both Capital Allowance (if applicable) and depreciating assets formerly known as plant and articles for the full depreciable lifetime of your property (up to 40 years) using two different methods (Diminishing Value and Prime Cost) – Your Tax Agent will advise which is the most appropriate for you to use depending on your individual circumstances.
  • Immediate write-off items (up to$300 in value).
  • Low-value pooling items (values greater than $300 and less than $1000).
  • Photograph of the property.
  • All reports are emailed upon completion and certification in PDF you will also be posted a bound hard copy if requested.

Why should I choose Quantum QS to do my Tax Depreciation Schedules?

Quantum QS Pty Ltd is a Chartered Quantity Surveying firm providing a full range of Quantity Surveying services to both the public and private business sectors as well as to individuals. These services include, but are not limited to:

  • Tax Depreciation for building owners
  • Asset Registers
  • Cost Planning
  • Building Cost Estimates
  • Post Contract Cost Control
  • Workplace Health & Safety Audits
  • Section 94A Quantity Surveyors Declaration Forms
  • Sinking Fund Forecast & maintenance Plans
  • Construction Contract Consulting and Management
  • Scott Schedule & Expert Witness Reports

Quantum QS Pty Ltd specialises in Tax Depreciation with a dedicated division in the field to help you maximise your tax benefits.

Does Quantum QS offer a guarantee?

We pledge to save you twice our fee in the first year or the report or it will be free. This guarantee is based on the tax deduction calculated 12 months from your settlement date.

Are your fees in relation to tax depreciation tax deductible?

When you commission Quantum QS to prepare a tax depreciation schedule report our fees can also be claimed at one hundred precent as a tax deduction.

Under section 25-5 of the Income Tax Assessment (ITAA) Act 1997 an expense incurred by a taxpayer in order to manage their tax affairs, such as commissioning a recognised and registered Quantity Surveyor to estimate the construction costs for the purposes of claiming a capital allowance on their depreciable assets which produces an assessable income to that individual tax payer or entity is deductible.

Therefore, under the Federal ITAA 1997 Act, all fees associated with the preparation of a Quantum QS Capital Allowance Schedule generically referred to as a tax deprecation schedule is 100% tax deductible.