The Amato Property Blog

Unpacking Tax Depreciation: Maximise Property Returns

One of the most overlooked yet financially impactful elements of property investment is tax depreciation.

In a recent conversation with  Mike Mortlock, a seasoned quantity surveyor and co-founder of MCG Quantity Surveyors, we delved into ways investors can maximise their property returns through the effective application of tax depreciations.

In this article, we explore the insights shared by Mike Mortlock on how property depreciation works, why it matters, and the steps investors can take to leverage it effectively. 

What is Property Depreciation?

Property depreciation refers to the gradual wear and tear that occurs over time in any physical property. While often associated with a decline in value, depreciation can work in an investor’s favor in terms of tax deductions.

A depreciation schedule, prepared by a qualified quantity surveyor, allows investors to claim tax deductions for this “wear and tear” each year. Essentially, it compensates investors for the decline in value of the property’s structure and certain assets over time.

While depreciation itself isn’t new, the concept can be elusive to property owners and new investors alike. Most have heard of depreciation but may not fully understand the potential tax savings it offers. “Depreciation schedules provide the roadmap to accessing these deductions,” says Mike Mortlock, emphasising that they’re an essential part of the investment journey.

Why Depreciation Matters for Investors

For property investors, cash flow is king. Depreciation schedules have the unique advantage of providing non-cash deductions, meaning investors don’t have to spend additional money to claim these tax benefits. This can make a significant difference in overall cash flow and investment viability.

The impact of depreciation on an investment property’s bottom line is underscored by its ability to put money back into investors pockets. For example, a detailed depreciation schedule might allow an investor to claim thousands of dollars in tax deductions each year—amounts that would otherwise be lost without proper documentation. This can enhance returns, especially in the early years of property ownership when cash flow may be tighter.

“For some investors, those tax savings could mean the difference between a cash-positive and a cash-negative investment,” Mike says. This financial relief can be instrumental in managing mortgage payments, covering expenses, or reinvesting in other properties.

The Structure of a Depreciation Schedule

A depreciation schedule typically covers two main components:

1. Capital Works Deductions: Also known as Division 43 deductions, these cover the structural elements of the property. Items such as walls, floors, ceilings, and even plumbing and wiring are included under this category. The capital works deductions generally account for significant tax benefits, with deductions lasting up to 40 years after construction.

2. Plant and Equipment Deductions: Referred to as Division 40 deductions, this category includes removable assets within the property, such as appliances, furniture, and fixtures. Items in this category depreciate at a faster rate and can yield higher deductions in the early years of property ownership.

Each component has its own depreciation rate and set lifespan, which quantity surveyors carefully calculate to maximise allowable deductions. Mortlock stresses the importance of engaging a qualified quantity surveyor who can navigate these nuances and optimize the schedule according to current tax regulations.

Changes in Legislation and Their Impact

The tax landscape has evolved, particularly since the 2017 changes introduced by the Australian government, which altered how depreciation applies to second-hand properties.

Under these changes, investors can no longer claim deductions on used plant and equipment in existing properties purchased after 2017. While this has shifted the dynamics, substantial benefits still exist, especially for new builds or substantial renovations where these restrictions don’t apply.

“While the new rules do restrict depreciation claims for some investors, they don’t remove them altogether,” Mike Mortlock notes. “Capital works deductions are still available, and in some cases, they can be quite substantial.”

These legislative shifts highlight the need for expert guidance. Quantity surveyors stay abreast of changes and can tailor depreciation schedules to align with the latest laws, ensuring investors aren’t claiming deductions improperly, which could lead to complications with the Australian Tax Office.

The Importance of Accurate Documentation

A crucial takeaway is the importance of thorough and accurate documentation. Not all assets depreciate at the same rate, and even minor details can affect the overall tax benefits. For example, certain items might depreciate faster than others, allowing for higher deductions sooner. Without a professionally prepared depreciation schedule, investors risk missing out on these optimised claims.

Investors should think of depreciation as an investment in itself. “A well-prepared depreciation schedule can essentially pay for itself in the tax benefits it generates over time,” Mike Mortlock explained. Moreover, schedules only need to be prepared once, making them a low-cost, high-reward tool in an investor’s toolkit.

Who Can Benefit the Most from Depreciation?

Almost all property investors can benefit from depreciation schedules. However, those investing in newly built properties, properties with substantial renovations, or commercial spaces tend to gain the most due to the broader scope of claimable assets.

Even older properties, though, can still yield considerable tax savings, particularly if there have been improvements or upgrades.

Investors should consult a quantity surveyor regardless of property age. “You’d be surprised at what can be claimed, even in properties that are decades old,” Mike notes. Quantity surveyors are trained to identify every possible deduction, from structural elements to fixtures, that would otherwise be missed in a standard assessment.

How to Get Started with Depreciation Schedules

For investors interested in setting up a depreciation schedule, the following steps should be followed:

1. Engage a Qualified Quantity Surveyor – Look for professionals who specialise in tax depreciation and are recognised by the Australian Tax Office as qualified to produce schedules.

2. Provide Detailed Property Information – The more information you provide about the property (including any renovations or upgrades), the more accurate the depreciation schedule will be.

3. Review the Schedule Regularly – Depreciation schedules aren’t one-size-fits-all. Major property changes or tax rule adjustments could impact the schedule, so reviewing it periodically with a professional is wise.

4. Consider the Long-Term Value – Remember, depreciation schedules deliver value over time. Even if upfront costs seem high, the cumulative tax savings typically far exceed the initial investment.

Final Thoughts

Depreciation is an essential but often underutilised tool in property investment. Understanding and applying tax depreciation can have a profound effect on cash flow and investment success.

In a field where margins matter, capturing every tax benefit is crucial.

By working with qualified quantity surveyors and staying informed about legislative changes, investors can unlock the hidden value in their properties, turning what may seem like a complicated tax deduction into a substantial financial asset.

Don’t leave money on the table—take the time to get a proper depreciation schedule in place, and let it work for you.

Investors who take this advice seriously may find that their property journey becomes not only more profitable but also more rewarding as they maximise returns in a tax-efficient manner.

For a deeper dive into this topic, check out the full discussion with Mike Mortlock HERE.

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Amato Property, together with their directors, officers, employees and agents have used their best endeavours to ensure the information passed on in this document is accurate. However, you must make your own enquiries in relation to the information contained in this document and seek advice from your financial advisor, broker or accountant to ascertain its application to your circumstances.