Tax depreciation represents a reduction in
the value of an asset due to usage over time. So if you buy a brand new
investment property while the value of the land may increase and your
property’s total value may increase over time some of the building features or
fixtures in the property will decline in value. One
way, the ATO will allow you to account for this is by
claiming a tax deduction for the depreciation each year.
There are two main types
of depreciation you can claim each year for your investment property on your
tax return:
- Construction
Costs
- Fit-Out
Costs
Construction Costs
For rental properties purchased
after Sep 15 1987 you can claim 2.5% of the construction costs each year over
40 years from the date the construction commenced. If you are going to claim
construction costs as a tax deduction each year, the ATO would not like you to
leave the cost base of the property the same as what you bought it for.
Construction costs are classified as ‘Capital Works Deductions’ by the ATO and
so reduce the cost base of your property. The ATO wants you to reduce your cost
base by the amount of any of these ‘capital works deductions’ you have made. So
you have to reduce the properties cost base by the amount of depreciation you
have claimed. So it kind of works in a sense that claiming depreciation will
reduce your taxable income now but lead to an increased capital gain later.
Fit-Out
These are items such as
fridges, curtains, TVs etc. These are deductible each year. The deduction can
be calculated using 2 methods:
- Prime
Cost Method
- Diminishing
Value Method
Prime Cost Method
This will lead to an equal
deduction in each year. The formula used to calculate the deduction is: Deduction = Fit-out Cost x (100% / Asset's
Effective Life) An asset’s effective life is how long it can be used for
by the property for a taxable purpose.
Diminishing Value Method
This method will lead to larger
depreciation claims in earlier years and smaller depreciation claims in later
years when compared to the prime cost method. Deduction = base value x (days held / 365) x (200% / asset’s effective
life) The base value is the fit-out value at the beginning of the year.
So the base value will change each year due to adjustments to account for last
year’s depreciation.
Brisbane tax depreciation is
complicated. It is probably one of the more difficult tax concepts for business
owners to understand. There are many complex rules that can prove quite elusive
for anyone but a tax aficionado. The best approach is to try not to get bogged
down with the technical rules and instead focus on the big picture. Brisbane tax depreciation need not be so intimidating. And it’s important to your cash flow.
The result of all those complex depreciation calculations is that the
government will pay for a portion of the cost of the assets you acquire to use
in your business. That payment comes to you through a reduction in the taxes
you pay over one or more years after you purchase the assets. Of course, to
really obtain a tax benefit from the depreciation deductions, either your
business must be profitable, or you must have another source of income that
your business losses can offset.
Comments
Post a Comment