Hello,
I have a few questions regarding depreciation, of how it works and is calculated.Example:
If my taxable income was $58000pa and an IP had a depreciation value of $58000,
Would this then mean that my taxable income would be $0 ?
Would the tax paid ($13572 on current tax scale) become a refund at tax time? Plus any other costs ie: Interest, Prop. Management fees, Prop. taxes, Maintenance, Repairs, ETC
($10000 for example)So total deduction: $68000 ($58000+$10000)
plus tax paid of: $13572
= $81572
minus taxable income: $58000
With $23572 to be my return from the ATO.Would the $23572 refunded from the ATO be taken into consideration when everyone calculates, if a property is +CF or -CF?
Any examples with calculations used would be very helpful.
Thanks in advance.Regrow
I’m no expert but my understanding is:
I don’t think the tax department are so generous that they will refund more tax than you pay in one year.
Also, you would need a property worth $2.32million to claim $58000 for one year (at 2.5%).
And any depreciation you claim over the years will be added onto the figure used to calculate capital gains tax when you eventually sell property. (So they get you anyway).
The tax department always wins[dead2]
lifexperience
Regrow,
Those are questions for an accountant and I’m sure one will jump in – Julia perhaps.Life,
It’s only depreciation claimed on the building (not fixtures and fittings) that is deducted from the cost base for CGT calculations. But upon sale, any investment property purchased after May 13, 1997 must have the building depreciation eligible to claimed during ownership deducted from the cost base whether it is claimed or not. So investors may as well claim the depreciation.Originally posted by depreciator:
But upon sale, any investment property purchased after May 13, 1997 must have the building depreciation eligible to claimed during ownership deducted from the cost base whether it is claimed or not. So investors may as well claim the depreciation.Wow, I did not know that it has to be deducted from the base regardless of whether you claim it or not. That doesn’t sound very fair at all.
I’d say very few accountants know about it either, Bennido.
We’re a depreciation service provider to the Count Wealth group – 700+ accountancy and planning practices nation wide. I canvassed some Count Members at their national conference and not many knew about it. I was talking to a Count guy recently. He had just been to an NTAA training session (NTAA are a huge, credible industry training group). They flagged this obscure rule and apparently the audience of accountants was gobsmacked.
It’s not well publicised. I guess in the event of an audit it’s something that the ATO may pull out.
Scott
Hi
LifeX
The figures are only examples so that My partner and I could understand them, and the calculations in a simple way. We are new to investing and would like to get our heads around the numbers before we purchase an IP.
We are no means trying to cheat the ATO, but mearly trying to understand how a calculation would be done and if any depreciation of a property would be used in a calculation to work out your taxable income.
Do other investors use this method as to help them determine (as part of there due diligence) if a property is a good deal or not?
Do you have any realistic examples, with calculations?The property would be used as a PPOR at first then rented out further down the track.
Regrow
Hi Regrow,
Depreciation is a two part deductible expense.
The first part of depreciation is referred to as the capital allowances as is calculated as being 2.5% of the building cost of the building as is deductible over 40 years if the property commenced construction after 16th Sept 1987. If the property commenced in the period 18th July 1985 – 15th Sept 1987 then you are entitled to a 4%/annum claim but over 25 years and not 40 years.
As such a $100000 building (no land component) would entitle you to claim $2500/annum over 40 years if it was built post Sept 87 or $4000/annum over 25 years if it was built between Sept 85 and 87 as above.
If you purchased the property mid way through it’s depreciable life you are entitled to claim the appropriate deductible amount ($2.5K or $4K as per above examples)for the years remaining. Eg a property is 10 years old when bought you will have 30 years of capital allowances claims remaining in the building.
A Quantity Surveyor can determine the construction costs even if the building is a ‘few’ years old.
In addition to the capital allowances there are also deductions for plant and equipment (stoves, blinds, airconditioners, carpets etc). Each of these has their own depreciable life time and depreciation rate.
Average plant claims can vary between 12%-40% depedning upon the nature, age, fitout and type of building. Once again a Quantity Surveyor can determine these values.
Depreciation deductions work in exactly the same way as any other deduction. The sum comes off your gross income to determine your gross taxable income.
The key difference being that with costs such as rates and insurance you pay for these first and get a part refund at the end of the financial year – these4 costs are sometimes referred to as cash deductions.
On the other hand depreciation deductions form part of the purchase price and as such you paid for them when you bought the property. That is why depreciation claims are sometimes referred to as being non-cash deductions – you didn’t pay for them out of your pocket first.
Ultimately depreciation should be seen as a bonus and the fundamentals of likely growth and/or rental returns should be your first priority.
Hope this helps.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Dereck
Thanks for the reply, very informative and helped clarify it for us but for one point.
What if the building comenced construction before 18th July 1985? just curious.
Thanks again
Regrow
Hi Regrow,
Oops – missed that bit.
Anything built before Sept 1985 is not eligible for any building (capital) depreciation apart from renovations and plant and equipment.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Don’t forget also on older properties that any renovations carried out after Feb 26, 1992 can be depreciated. And it doesn’t matter who did the renos i.e. you or a previous owner.
Scott
regrow,
We are no means trying to cheat the ATO,I didn’t say you were?????
Good luck with the research, you will work it out. Like I said I’m no expert :o)
lifexperience
Glad to see you hitting this one depreciator
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