How a Tax Depreciaiton Schedule Works

There are two areas of depreciation that are available for investors; these are Capital Allowance on Building and Plant and Equipment. 

1st Area: Capital Allowance on Building

The ATO states that investment property owners are eligible to claim deductions for capital items or structural improvements which are regarded as part of the building itself.

Legislation allows all plants to be given a new effective life from settlement date and is depreciated at various rates generally ranging from 5% to 20%. This is available for all investment properties, both new or second hand regardless of age. This covers such items such as floor coverings, blinds, water tanks, air-conditioning and white goods etc…

 

2nd Area: Plant and Equipment

Two different methods for Depreciating Plants and Equipment

 

Prime Cost Method and the Diminishing Returns Method

Prime Cost Method / Straight Line Depreciation

The Prime Cost Method is the most simplistic method, as it assumes the value of carpet or a hot water system, for example, decreases by the same dollar amount each year of its effective life.

 

To calculate your 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, a carpet valued at $2,000 with an effective life of 10 years and used wholly for the purposes of generating income for the full year would give you an annual deduction of $200 ($2,000 x 365/365 x 100 percent/10).

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 investors receive a greater deduction in the early years, when it is most required, and a diminishing deduction in subsequent years.

 

For example, a carpet with a value of $1,200 and bought 19 days into the tax year, your deduction in year one would be $171 ($1,200 x 346/365 x 150 percent/10)

All Investment Properties are eligible

All income producing capital investments are entitled to depreciation allowances on a year to year basis. A misconception is commonly made that only new properties are entitled to depreciation; this is definitely not the case. Although new properties attract higher rates of depreciation, older properties can still benefit significantly, improving the efficiencies of investing and claiming what they are entitled to