Under current tax law there are 3 types of expense classes that you may claim as deductions over a number of years for an investment property:
- Borrowing Expenses
- Amounts for decline in value of depreciating assets (Fixtures and fittings)
- Capital works deductions (Capital allowance on building and construction)
Borrowing expenses associated with establishing a loan to fund the investment property. These include bank establishment and settlement fees, valuation fees, lenders mortgage insurance, title search fees, mortgage stamp duty and fees for preparing and registering the mortgage. See Borrowing Costs calculator.
The deductions are spread over a 5 year term or the term of the loan which ever is the lesser. These are usually presented as amortised borrowing costs in various negative gearing calculators.
Amounts for decline in value of depreciating assets
You can deduct an amount equal to the diminishing value of depreciating fixtures and fitting during the income producing year. It is a taxation benefit as it allows you to offset the amount of tear wear on the property.
There are essentially two ways of calculating depreciation for fixtures and fittings:
- Prime Cost Method – Allows you to apply the depreciation rate uniformly every year over the effective life of the asset.
- Diminishing Value Method – Applies a depreciation rate and reduces the amount to be claimed each year. It assumes that the diminishing value each year is in constant proportion of the remaining value until the life of the asset expires.
(The rate of depreciation applied to each method differs and hence may affect your overall tax benefit).
You can choose either method for the purpose of depreciating fixtures and fittings however, both methods are based on the effective life of a particular asset as described in the depreciable items supplied herewith (the method of depreciation chosen may depend upon your age, income and other financial factors – Always obtain advice from your accountant as to which method may meet with your financial objectives).
Example of depreciable items:
Central Gas Hot Water Heating
Underbench Electrical Oven & Cooktop
Video Intercom Security System
Alarm Security System
(The above example is a representation schedule only and it does not in any way purport to be complete)
CAPITAL WORKS DEDUCTION
Depreciation on the Building
Under current tax legislation residential buildings constructed after July 1985 that are used for investment purposes and are income producing can be depreciated (based on the actual cost of the building).
However, depending on the commencement date of construction the deductions would generally be spread over a period of 25 to 40 years. You can only claim the deductions once the property has been completed.
The depreciation rate depends upon the year that the building was constructed. The legislation also allows for claims based for structural improvements such as extensions or alterations. The deductions cannot exceed the construction expenditure which is basically the actual cost of constructing the building or extension.
|Date Construction Commenced
||Annual Rate Of Deduction
|Before 22 August 1979
|22 August 1979 to 21 August 1984
|22 August 1984 to 15 September 1987
|After 15 September 1987
Items such as floor tiles and the sink within the property are considered to be part of the building and hence, are included in the total cost of construction of the building.
The rate of depreciation is applied to the total cost of construction of the Building. In case of an apartment or any other building in a strata title situation the construction costs are apportioned. Usually you may request a depreciation schedule from the builder for your specific property. This schedule will form the basis of your depreciation claims. These deductions (usually referred to as non-cash deductions – simply because you do not outlay any cash during the year) can considerably reduce your annual taxable income. Make sure that a qualified tax accountant prepares and lodges your tax returns so that your deductions may be maximised.
Please refer to our Negative Gearing Tax calculator for an estimate of your depreciation benefits on a proposed property.