A Guide to Property Depreciation for Australian Non-Residents

Property investors find themselves hit with expensive taxes at the end of the financial year. As a non-tax resident property investor, you don’t benefit from the tax-free threshold and must pay upwards of 32.5% for any Australian-sourced income. Therefore, reducing your taxable income is vital to save money.

Read on to learn how depreciation schedules work and how you might save money on your investment property taxes when you claim depreciation.

What Is Property Depreciation?

Depreciation refers to assets or property that decline in value over time. When you buy an asset brand new, it immediately begins to lose value. Think of second-hand cars or other items. Even in perfect working condition, they’re cheaper than the newest version. This is because assets decline in value.

Property depreciation is a tax break that lets investors offset declining value from their taxable income. Allowable deductions fall into two categories:

Capital works allowance: The decline in value of the building’s structure
Plant and equipment depreciation: The decline in value of removable items within the property

Australian tax law allows investors to claim depreciation deductions for the declining value of the structure and permanently fixed assets as well as plant and equipment assets (e.g., white goods, carpet, and curtains).

With property depreciation deductions, you pay less tax and benefit from a “non-cash deduction”, – meaning that you don’t pay for it on an ongoing basis. The tax deductions get included in the purchase price of the property.

Why Is Investment Property Depreciation Important?

Investors buy investment properties to generate income. Typically, an investment property will earn money through rental income and capital gains. However, the Australian Tax Office classes investment properties as taxable assets.

Claiming depreciation tax deductions to account for natural wear and tear can offset your assessable income and reduce tax payable. If you’re implementing a negative gearing strategy, you need to take advantage of depreciating assets on your tax return to ensure you make a capital loss.

It’s even more vital for expat non-tax residents to claim their residential investment property deductions. Non-residents, for tax purposes, must pay a higher tax rate, meaning you pay 32.5% on all Australian-sourced income up to $120,000. A property tax depreciation schedule could potentially save you thousands of dollars.

How to Calculate Property Depreciation?

Below, we’ve outlined the steps to claiming depreciation as a tax deduction on your residential property investment. There are two calculation methods to determine your property tax depreciation schedule.

Prime Cost Method

The prime cost method assumes the asset depreciates uniformly over its effective life – it declines in value the same amount each year.

To use this method, multiply the asset’s cost by the number of days you’ve owned it. Then, divide by 365. Multiple this figure by the asset’s effective life.

As a formula:

The asset cost × (days held ÷ 365) × (100% ÷ asset’s effective life)

Say an asset costs $10,000 on the 1st of July when you purchase it, with an effective life of five years. The calculation would look like this:

$10,000 x (365 ÷ 365) x 20% = $2,000

You can claim $2,000 yearly for five years on your tax depreciation schedule, saving you $650 in tax payments each year. Overall, you deduct the entire $10,000.

Diminishing Value Method

On the other hand, the diminishing value method assumes that the asset depreciates more quickly at the start of its life. Therefore, you claim more depreciation in the beginning than in later years.

Each year you claim deductions for the depreciating assets, and the item’s base value reduces by that amount.

The formula to calculate the diminishing value of assets:

The base value × (days held ÷ 365) × (200% ÷ asset’s effective life)

Say the asset had a purchase price of $10,000 when you bought it on the 1st of July. Its effective life is five years. The calculation would look like this:

10,000 x (365÷365) x 40%

You could claim the following amounts:

Year 1: $10,000 x 40% = claimable amount: $4,000
Year 2: $6,000 x 40% = claimable amount: $2,400
Year 3: $3600 x 40% = claimable amount: $1,440
Year 4: $2160 x 40% = claimable amount: $864
Year 5: $1296 x 40% = claimable amount: $518

Overall, you would claim tax deductions of $9,222.

How Does Depreciation Work on Investment Properties?

When you purchase an investment property in Australia, the Australian Taxation Office assumes you have also purchased all the separate depreciating assets inside (called ‘plant’). The ATO requires property investors to separate their depreciation schedule into ‘capital works deductions’ and ‘plant and equipment deductions.

Basically, you have to determine which items are permanent parts of the building and which are removable.

While you can estimate a property depreciation schedule, you’ll need to speak to registered quantity surveyors to get official tax depreciation schedules. A quantity surveyor will assess your residential rental property at tax time.

Capital Works Deductions

The best way to understand capital works is to consider what you cannot remove from the property, such as walls, the roof, bathtubs, and toilets. Property investors can claim capital works deductions for wear and tear at a rate of 2.5% for up to forty years as long as the property was built after the 15th of September 1987.

Plant and Equipment Depreciation

Removable items, such as white goods, carpets, and curtains, are considered plant and equipment. The Australian Taxation Office has a list of around 6,000 various separate depreciating assets items, which all have an ‘effective life’ for claiming depreciation deductions. For instance, according to ATO, you can claim depreciation for a dishwasher for eight years.

New Vs. Old Buildings

There are four categories under which you can claim tax depreciation deductions on investment properties:

Built before the 18th of July 1985: If your investment property was constructed before this date, you can only claim plant and equipment depreciable assets, not capital works. Your tax agent cannot estimate total construction costs on the tax depreciation schedule.
Built between the 18th of July 1985 and the 26th of February 1992: If your residential investment properties were made after July 1985, you are able to claim capital allowances as well as plant depreciation. The deduction rate for buildings and capital works between the 18th of July 1985, and the 26th of February 1992 is 2.5% to 4%. Commercial and industrial properties may have different cut-off dates.
Renovated properties: Renovated investment residential properties built after February 1985 can claim tax depreciation, even if previous property owners completed the renovation.
Brand new and substantially renovated properties: You are able too claim deductions for the declining value of a depreciating asset in the property.

Additionally, from the 1st of July 2017, you can only claim new plant items you purchased for your residential investment property. You cannot claim a second-hand depreciating asset.

How Do I Get a Depreciation Schedule?

You can speak to a tax agent, accountant, or quantity surveyor about calculating a tax depreciation schedule for your rental properties. While a tax agent or accountant can estimate depreciable assets, only quantity surveyors can provide an official depreciation schedule.

Tax depreciation schedules cost varying amounts, depending on the type of property, its location and size. Many quantity surveyors will provide discounts in the first year. Moreover, you can deduct any quantity surveyor fees you pay to get your depreciation schedule.

It will take approximately two or three weeks to complete your tax depreciation schedule from the quantity surveyor inspecting your property.

When Should I Claim for Property Depreciation?

The best time to organise your tax depreciation schedule is straight after settling the property. While the schedule will not expire, you will need to update it for renovations, repairs, or replacements in the property. Investment property owners prefer to get quantity surveyors to inspect their rental properties before the tenants move in.

However, don’t worry if you haven’t correctly organised your tax depreciation schedule with quantity surveyors before lodging your tax return. Generally speaking, you have up to two years to amend your tax return from the ATO’s notice of assessment date for the relevant year. A tax agent can provide professional advice on amending tax returns.

Example of Property Depreciation Tax Deductions

Frances lives in Singapore but owns a rental property in Australia for which she must lodge a yearly tax return. As a non-resident for tax purposes, she only pays tax on her Australian-sourced income. Her investment property earns $800 a week ($41,600 annually).

Her insurance, maintenance and management costs come to $20,000 a year – which she puts on her tax return under tax deductions. Frances wants to get her assessable income as low as possible, so she consults a tax agent to see what she can deduct for depreciation. We’re assuming all the plant items are one year old. Frances uses the prime cost calculation:

Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s life)

Dishwasher (8 years, cost $1,000) = $125
Fridge (6 years, cost $2,200) = $366.74
Carpets (8 years, cost $12,250) = $1,531.25
Curtains (6 years, cost $10,000) = $1,667

Frances can claim $3,689.99 for depreciating assets, meaning she only has to pay tax on $17,910.01. At the non-resident rate, this is $5,820.75 tax payable.

How Much Money Will I Save With Property Depreciation Deductions?

Every property is different; the amount you save will depend on the property type, location, size, and cost of your assets. You can estimate depreciation deductions with the above methods or find a free depreciation calculator.

Before submitting your tax return, speak to a professional tax agent about your depreciation schedule and deductions. A tax agent will know exactly how much money they can save you to get the most out of your investment property.

Frequently Asked Questions

How is property depreciation calculated?

You can estimate your investment property depreciation tax deduction with one of two calculations or use online depreciation calculators. You’ll need to know the estimated construction cost of your property. If you’re unsure, speak to a quantity surveyor or tax agent.

How much depreciation can you claim on an investment property?

If your property was built after the 15th of September 1987, you could claim a depreciation rate of 2.5% – 4% each year until the building is 40 years old.