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Depreciation and the value-add it offers investors

Depreciation and the value-add it offers investors

by Grace Ormsby | November 28, 2019 | 1 minute read

The ability of depreciation to improve a property investor’s portfolio position should not be underestimated, a quantity surveyor has flagged.

Depreciation
Depreciation
by Grace Ormsby
November 28, 2019

Duo Tax’s quantity surveyor, Tuan Duong, joined Phil Tarrant on a recent episode of The Smart Property Investment Show to better help investors understand their portfolio’s “relationship with depreciation”.

Depreciation, as per the Australian Taxation Office’s guideline, acknowledges that declining value for a particular asset over a period of time and the wear and tear on the asset itself is a deductible component of your income that’s assessed for that financial year, Mr Duong noted.

Explaining his role in relation to this, the quantity surveyor said his job is to “assess the depreciable asset’s value and then over time apply a depreciation rate for each financial year that’s given by the ATO”.

Ultimately, the quantity surveyor provides the asset value only, he highlighted, with “the depreciation rates actually com[ing] from the tax commissioner itself”.

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The Tax Office will “come up with various effective lives on each asset, depending on the type of asset [and] the wear and tear on that asset”, Mr Duong said.

Giving examples, he commented that a carpet would generally “yield about 13 years with a depreciation, whereas assets like air conditioners only last seven years”.

“So that’s our job – to apply those rates relative to the type of asset,” he continued.

With the quantity surveyor’s role being to value each asset, Mr Duong clarified that his role sees him making assessments between types of assets that can or can’t be considered as “depreciable”.

“Obviously, excavation is not a depreciable component… and likewise with landscaping, softscaping cannot be depreciated but you can depreciate a retaining wall.”

“It’s about identifying what’s hardscape, manmade and what’s natural – so we’ve got to make an assessment on those things.”

Reiterating Mr Duong’s points, Mr Tarrant reflected that “a quantity surveyor’s job is to apply the rules set by the tax commissioner around the process of depreciation, and you use a depreciation schedule to do that?”

“That’s correct,” Mr Duong said.

But why would a property investor need to worry about this?

According to Mr Duong, “it’s super critical”.

Early on in his own investment journey, Mr Duong said he learned from his accountant that the depreciation value schedule can add “a lot of value” to a property journey, especially in terms of negatively gearing a property.

Chiming in, Mr Tarrant said, “If you get this depreciation bit right, it can really change or amplify your investment and even turn some investments from negatively geared to positively geared, or support that journey over time”.

“Having a negatively geared property but turning [it] into a positive cash flow investment property – it can make a massive difference to your lending capacity and whatnot for future properties,” the quantity surveyor explained.

Depreciation and the value-add it offers investors
Depreciation
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