The decline in value rules are contained in the Uniform Capital Allowances System in Div 40 of the ITAA97 (‘the Tax Act’). Broadly speaking these rules allow a deduction each year for part of the capital cost of depreciating assets used to produce assessable income, such as rent from an investment property.
“Depreciation” as a word no longer occurs in the tax law. The current phrase is “decline in value” and this phrase corresponds with the accepted meaning of depreciation, ie the decline in value of an asset over its expected effective life. We will use the word “depreciation” here.
Depreciating assets includes air conditioners, hot water systems, heaters, carpets, curtains, blinds, light fitting, stoves, hot plates, lifts. The ATO have released this guide to common depreciating assets in rental properties.
The cost of depreciating assets is the amount paid to acquire them, and any later costs paid to get the asset into a usable position or condition. This cost is claimed as a tax deduction over a number of years, loosely based on the concept of effective life.
Clients with property investments are usually well-advised to get a quantity surveyor’s report for that property. That report can then underpin a depreciation schedule that maximises the tax effect of holding that property. In most cases, investors are able to claim depreciation on things of which they were not aware.
You can really add value by identifying one or more good quality and good value quantity surveyors in your area and organising a referral to that person.
Adviser tip – here is how you might suggest it
Can you see these paragraphs in your next SOA:
We note that you have an investment property. We recommend that you organise for a quantity supervisor’s report for your property. This report can then be used to underpin an up-to-date depreciation schedule for this property, ensuring that the after-tax performance of the property is optimised.