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

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

By Mike Mortlock

Albert Einstein said if you can’t explain something simply, then you don’t understand it well enough. So, it’s time to test my understanding of tax depreciation schedules

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.

Let’s say your salary is $88,000 per year, and you have no other deductions. According to the ATO’s simple tax calculator, you’ll be paying $20,507 in tax (2015/2016 year).

We were the first quantity surveyors to publish average deductions in the first full year of claim, this was back in 2015. We’ll be updating our stats soon, but this figure was $9,183 worth of deductions, so let’s assume this figure is available. The $9,183 deduction comes off the taxable income of $88,000 so that brings it down to $78,817. Using the same tax calculator, the tax payable is now $17,162.52.

Breaking that down, a depreciation schedule on this hypothetical, yet average property produced a saving of $3,344.48 within the first full year. An average depreciation schedule is around the $600-$700 mark, so the report is paying for itself five times over within one year.

There are certainly properties that won’t achieve that level of deductions, and some that won’t have anything at all. By the same token, many properties will show over $20,000 worth of deductions within the first year.

The most important thing is to contact a quantity surveyor for an indication of the deductions you might have available to you, as the tax savings can make a huge difference to your investment cash flow and/or convert the pain of a trip to the accountant into pure joy!

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About the Blogger

Mike Mortlock

Mike Mortlock

Mike Mortlock is a quantity surveyor and director of MCG Quantity Surveyors. MCG specialise in tax depreciation schedules and construction cost estimating for investors.

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  string(51) "Boost for investors as app sets up off-site bidding"
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  string(55) "boost-for-investors-as-new-app-sets-up-off-site-bidding"
  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

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Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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["secure"]=> int(0) ["page_description"]=> string(11) "sample desc" ["page_rights"]=> NULL ["robots"]=> NULL ["access-view"]=> bool(true) } ["initialized":protected]=> bool(true) ["separator"]=> string(1) "." } ["displayDate"]=> string(19) "2018-06-18 03:15:56" ["slug"]=> string(72) "18171:how-a-move-to-hong-kong-impacted-julia-s-australian-property-goals" ["catslug"]=> string(28) "45:smart-property-investment" ["link"]=> string(92) "/investor-stories-1/18171-how-a-move-to-hong-kong-impacted-julia-s-australian-property-goals" }
How a move to Hong Kong impacted Julia’s Australian property goals
object(stdClass)#1195 (52) {
  ["id"]=>
  string(5) "18159"
  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
  ["alias"]=>
  string(82) "common-referrer-practice-of-being-paid-on-both-sides-of-the-fence-coming-to-an-end"
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  string(246) "

The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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