In the beginning…

The principle of tax depreciation is pretty simple. You buy something new, and over time, its value deteriorates – that is, it “depreciates”. Eventually, it’s worth nothing. In business terms, depreciation is an expense to be deducted from taxable income each year. And if you’ve got an investment property then you’re in business and you should be claiming every dollar of depreciation allowable under Australian tax legislation.

The “something” that you purchased can be anything applied to producing income. In the case of a residential investment property, it may be a new crockery set for the kitchen, or a new microwave in the kitchen, or it could be a completely new kitchen!

 

The Tricky Bit

Things don’t lose their value over identical time periods. Put differently, things depreciate at different rates. For example, kitchen crockery loses its value faster than a new microwave. But a new microwave loses its value much faster than a new kitchen.

Quite aside from the different depreciation rates across different asset classes, there are different methods of calculating depreciation. Some things lose their value by a fixed amount each year (prime cost depreciation), and some things lose their value faster in earlier years, and slower in later years (diminishing value depreciation).

The tricky bit relates to knowing which method to apply, and over what period of time to apply it. There are various rules and processes laid out by the ATO, and if you’re not familiar with those rules it can be a minefield with hefty penalties applied by the ATO if you get it wrong.

It can be such a minefield that the ATO requires the calculation of these costs to be performed by a professional expert known as a Quantity Surveyor, but not just ANY Quantity Surveyor. Specifically, the ATO requires the QS to be registered with Australia’s Tax Practitioner’s Board (TPB).

Fortunately for YOU, the Tax Depreciation team at Asset Reports know the rules inside out. We live and breathe it every day, and we love it. Show us a property full of depreciable items and we’ll show you a team who are all smiles and in their element.

 

What’s “scrapping”?

Good question. “Scrapping” is eliminating the asset from your property before it has reached its allowable minimum value. This might occur if you throw something away, or demolish an area of your property while there is still value remaining in the assets being demolished. That remaining (or demolished/disposed) value can be depreciated in a lump sum, in the one year. And whatever you replace it with, can be depreciated too!

What Type of Investor are you?