Using depreciation to maximise your cash flow
20.8.2007
Depreciation is a legislative allowance introduced by the Australian Tax Office (ATO) that allows property investors to claim back the decrease in value of their properties and fittings.
However, it is important to get the right advice so you can claim the maximum depreciation on your property, therefore maximising your cash flow.
Depreciation can be claimed to compensate for the decline in value of the building and assets over the period in which the property is used to produce and income.
There are two distinct depreciation allowances available for investment properties:
- Division 40 - Depreciable Assets (Plant and Equipment Allowance) eg carpets, cook top, ovens, air conditioner, window blinds or curtains, dishwasher, dryer and hot water system.
- Division 43 - Capital Works Allowance (Building Write-off Allowance).
Regardless of age, all properties contain some form of claimable depreciation such as Depreciable Assets, which is re-valued and given a new effective life from the date of settlement. In addition, Capital Works Allowance is available for all residential investment properties with a construction start date from 18 July 1985.
To use an analogy, if you purchase a vehicle for the sole purpose of earning a living then under income tax law you are allowed to claim the depreciation of the vehicle against your current income. The value (its net worth) gradually reduces over time as it wears out and gets old.
In recognition of this fact, the Government has allowed the cost of the vehicle to be written off over a period of time (depreciation). The same rules apply for residential properties purchase for investment.
When preparing your tax return, you should claim the maximum allowable depreciation on your investment property to ensure your cash flow is maximised. You may also be able to claim the cost of demolition and improvements made to the property.
The best way to do this is to have a depreciation schedule prepared by qualified professionals. The schedule will list all allowable buildings, plant and equipment, their value and the depreciation allowance that can be claimed. Armed with this information the Kensington Partners team can ensure you are getting the most out of your investment property.
For more information on depreciation and how to use it to maximise your cash flow, please call our office on (08) 9328 1799.