Tax depreciation is the process of assigning a cost to a tangible asset over its useful life for the purpose of reducing taxable income. This is done by taking a portion of the asset’s purchase price as an expense each year, rather than expensing the entire cost in the year it was purchased. The portion of the asset’s cost that is expensed each year is determined by a schedule known as the depreciation schedule, which is set by the tax laws of the jurisdiction in which the asset is located. This allows businesses to deduct a portion of the cost of the asset from their taxable income over the course of several years, which reduces the overall tax burden.
The structure of a building, as well as the assets contained within, deteriorates with time. Depreciation is the process of claiming a deduction for your property’s natural wear and tear. The Australian Taxation Office allows owners to deduct this expense, unlike other types where you need to outlay money in order to make that claim.
Under the current Australian income tax system, you are allowed to claim certain deductions for expenditure incurred in gaining or producing assessable income. Depreciation is a non cash deduction which can be claimed by most property investors. To claim for Tax Depreciation deductions you will need to file under two sections of the income tax act: ITAA 1997, Division 43 (Capital Works) often referred to as “building or structure” and Division 40 (Capital Allowances) often referred to as plant and equipment.
There are two methods that you can use to calculate depreciation, the first being Prime Cost method which assumes that the value of a depreciating asset decreases uniformly over its effective life or Diminishing Value method which assumes that the value of a depreciating asset decreases more in the early years of its effective life.
Who can claim Tax Depreciation?
If you own a residential investment property or commercial structure, your properties are eligible for depreciation deductions. Depreciation deductions are offered on most assets, whether new or old.
How to Claim Tax Depreciation
Using a quantity surveyor to claim tax depreciation is a smart idea. Quantity surveyors are specialists in determining the worth of construction projects.
eDepreciation can give you a report on the depreciation rate that can be claimed on your property and when you can claim it. You can then report to your accountant and include it in your tax return.
