What is a tax depreciation schedule and how can it change your tax return?

A tax depreciation schedule is simply a report detailing the depreciation entitlements available to you within your investment property. The depreciation entitlements can be broken into two simple categories;

1. Capital allowances (Division 43)
Capital allowances are based on the historical construction cost of the property, excluding the value of plant and equipment assets, which we’ll come to in a moment. Capital allowances can be claimed on your original residential property, where it was constructed after the 15 September 1987, or on any subsequent qualifying renovations or improvements completed by either the previous owner or yourself.

So, to put it another way, say your property was built in 1996. We will estimate the cost to build the property at that time, and you’ll be able to claim 2.5 per cent of the value each financial year. So, if the total build cost was $200,000 and the plant items were $30,000, the remaining $170,000 would attract a 2.5 per cent deduction of $4,250 each financial year for 40 years from the date of construction.

2. Plant and equipment items (Division 40)
Plant and equipment items are generally ‘loose assets’ or control panels for automated systems as defined by the Australian Taxation Office (ATO). The ATO publishes a list of these assets every year around July. In a residential property, the most common plant assets are;

• Bathroom accessories
• Exhaust fans
• Hot water systems
• Carpets
• Vinyl
• Blinds
• Curtains
• Air conditioners
• Door closers
• Security systems
• And many more...

These assets are estimated as part of a depreciation schedule, and you’ll generally be able to claim between 100 per cent and 20 per cent of the estimated residual value each year. Each plant and equipment item has a different depreciation rate, but we’re sticking with an overview here.

Therefore, a tax depreciation schedule includes these two components of depreciation and their estimated value. The schedule itself will show 40 years’ worth of depreciation in two different accepted methods. One tends to be more aggressive in the first few years (see diminishing value) and the other maintains a more constant level of depreciation (see prime cost).

Now that we know what a depreciation schedule is, how can it change your tax return?

We’re not qualified to provide accountants advice, so you should always speak with them to find out the EXACT impact on your personal situation. Essentially though, the total depreciation comes off your taxable income. Let’s run through a quick scenario.