Depreciation is an income. Many people may have doubts about the concept of depreciation. One has to agree that the depreciation is a book entry. It does not result in any direct addition to the income. However, you can count it as income because you get tax benefits. When you consider tax depreciation, you end up paying less tax. This deduction in the tax payable automatically becomes your income. Let us see some of the prominent assets that qualify for tax depreciation.
Any asset that earns income for you qualifies for tax depreciation deduction provided the asset has a residual active life. This could also include the properties you rent out to people. This rental income is taxable. The ATO allows you a tax depreciation based on the value of the asset and its residual active life. Usually, such properties have an active residual active life between 25 and 40 years. Reputed tax surveyors such as MCG Quantity Surveyors consider a 40-year tax depreciation schedule.
These deductions on depreciation of properties qualify under Division 43. You also know them as capital works deductions. Ne should have an idea about the deductions that qualify under Division 43. One should note that constructions of residential buildings after 17th July 1985 alone qualify for tax depreciation. However, if you make alterations or improvements to buildings constructed prior to this date, they qualify for the tax depreciation as well.
The following expenses qualify for capital works deduction.
- The cost of constructing the residential or commercial property
- The cost of any alterations you make to the property subsequent to the above mentioned dates
- The cost of capital improvements you make to the surrounding property
You can also claim the architect fees, surveying fees, and excavation expenses while accounting for the capital works deduction. However, the land acquisition cost is not eligible for any deduction.
The rates of depreciation and the period depend on the type of construction and the date of the construction. Usually, the period does not exceed 40 years. Secondly, one should also note that you should earn income from the property. If you use it for self-occupation, you do not get this benefit of tax depreciation.
Under Division 40, you can claim deduction on the depreciation of other assets such as curtains, blinds, air conditioners, solar systems, water heaters, and carpets. The list can be an exhaustive one. The best aspect of this deduction is that it is available irrespective of the age of the building as well as the asset. However, the active residual life of such assets will be short. Accordingly, one has to calculate the rate of depreciation. If the active life is say 5 years, the rate of depreciation should be 20% in the straight line method. This entails that the value of the asset becomes ‘zero’ at the end of the active life period. In case, the asset still serves you after the active life period, you do not have the right to claim any kind of tax depreciation.