Depreciation: Tax Benefits for New Build Investors

### Understanding Depreciation in Property Investment Depreciation is a critical concept for property investors, particularly those investing in new builds. It refers to the decline in value of an asset over time and can be claimed as a tax deduction. Under the Income Tax Assessment Act 1997 (ITAA 1997), there are two main types of depreciation for property investors: Division 43 capital works and Division 40 plant and equipment. Division 43 capital works involve the building's structure and fixed items, like walls and roofs. These can be claimed over a 40-year period. Division 40, on the other hand, covers plant and equipment such as carpets, appliances, and air conditioning units, which generally have shorter effective lives. ### Why New Builds Offer Maximum Depreciation Newly constructed properties present a significant advantage for investors seeking depreciation benefits. This is primarily due to legislative changes under the Treasury Laws Amendment (Housing Tax Integrity) Act 2017. According to the ATO, these changes restrict plant and equipment deductions on previously used assets. The grandfathering cut-off was Budget Night, 9 May 2017 at 7:30pm — contracts exchanged after this date on established or previously tenanted properties cannot claim Division 40 deductions. The measure applies to income years commencing on or after 1 July 2017, meaning investors in established properties can no longer claim deductions for previously used equipment. New builds, therefore, offer maximum depreciation potential as they include brand-new plant and equipment eligible for full deductions. ### The Role of a Quantity Surveyor To accurately claim depreciation, investors must obtain a depreciation schedule, typically prepared by a qualified Quantity Surveyor. This professional assessment is crucial as the ATO requires detailed documentation for Division 43 claims. The schedule outlines the depreciation deductions available for both capital works and plant and equipment, ensuring compliance and maximising potential tax benefits. ### Illustrative Depreciation Scenario Consider a $650,000 new apartment. While figures can vary, industry data from BMT Tax Depreciation suggests that in the first year, an investor might claim approximately $12,000 in depreciation. This scenario is purely illustrative and not a guaranteed outcome. It serves to highlight the potential tax savings available through depreciation. ### Interaction with Negative Gearing Depreciation plays a significant role in reducing taxable income when combined with negative gearing. Negative gearing occurs when the cost of owning a rental property exceeds the income it generates, creating a taxable loss. This loss, including depreciation, can be offset against other income, potentially reducing the investor's overall tax liability. ### Considerations for SMSF Investors Self-Managed Super Funds (SMSFs) can also benefit from property depreciation, provided the investment aligns with the fund's investment strategy and complies with the Superannuation Industry (Supervision) Act 1993. SMSF investors should ensure that they obtain a depreciation schedule to maximise tax efficiencies. ### Timing is Crucial Obtaining a depreciation schedule before lodging the first tax return is essential. Doing so ensures that all available deductions are captured from the outset, optimising the financial returns on the investment property. Steinhardt Property & Business has observed increased enquiries from investors keen to explore the tax advantages of new builds, recognising the potential for enhanced returns through strategic tax planning. For more detailed guidance, investors are encouraged to consult with a tax professional or visit the ATO's website. *Disclaimer: This article provides general information only and does not constitute financial or taxation advice. Investors should seek professional advice tailored to their circumstances.*