How investors can save over $10k a year in tax


Anyone who has ever bought a new car will know all about depreciation. The moment the front tyres hit the bitumen outside the car showroom, the vehicle’s value drops by amounts that would make your eyes water if you weren’t intoxicated by the new car smell.

But depreciation can apply to investment properties too, especially new ones, in ways that should make you smile.

For depreciation on an investment flat (or house, for that matter) the Australian Taxation Office will allow you to claim tax deductions for the anticipated loss of value as building gradually age and appreciate the end of their natural lifespan.

Okay, forget the fact that the only apartments that have lost value in the past few years are those that have been falling down around their owners’ ears.

The ATO’s notional figure is calculated over 40 years, so if you bought a new apartment as an investment for $800,000 and the cost of building it was $500,000, you could claim $12,500 a year on the structural element alone.

Then there are all the fixtures and fittings, which depreciate at different rates, depending on their lifespans. A dish washer, for instance, will depreciate at a different rate from, say, the carpet that you installed.

And there are two different rates by which depreciation is calculated; Prime Cost, which is calculated on an equal division over the expected life of the contents, and Diminishing Value, which gives you a higher allowance at the beginning of the period but reducing as the contents age.

By the way, if you invested in an existing property, depending on its age, structural cost can be depreciated, but the fixtures and fittings are considered to have been fully depreciated having been sold second-hand, effectively.

You can’t depreciate your principal place of residence but it you are an investor owner, you can claim these deductions against the income from your property, all of which contributes to your negative gearing. 

However, as Sydney property investment lawyer Tony Cordato explains, there is a potential sting in the tail. When you come to sell the property, the depreciation claimed is effectively added to the capital gains amount on which you will be taxed.

Tony cites an ATO example on its website where a couple’s capital gain on their investment property is $110,000 but they have to adjust the taxable figure by $60k, which is what they claimed in depreciation over the five years that they owned the investment.

Thus, they are taxed on $170,000 capital gain, reduced by half to $85,000 because they owned the property for more than a year.

It’s all pretty complicated and you are going to need to hire a quantity surveyor and an accountant to get the full benefit of depreciating your property

So, given, the hassle, the costs and the capital gains hike at the end of the process,  is there a benefit in going for depreciation?

“At the very least, you have the benefit of having money to spend right now, rather than waiting for it to wash through your taxes at the end of your investment,” says Brad Beer of BMT Tax Depreciation.

“But if you structure it correctly and get the right advice, it can be a significant boost to your investment gains.”

If you think this is for you, talk to a tax depreciation consultant – just search online for those words – or go to the ATO website and search for “depreciation” and all will be revealed.

This column first appeared in the Australian Financial Review.

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