Depreciation
Depreciation allows you to claim deductions for the decline in value of building structures and plant & equipment over time.
When you spend cash on renovations and equipment for an asset you cannot immediately write it off as a deduction. Instead it is added to the cost base; and then depreciated to zero over it's useful life.
Depreciation is a normal income tax deduction; whereas selling with a high cost base would reduce capital gains. As a result of the Capital Gains Discount, getting a depreciation schedule in place is a more valuable and more timely tax minimisation method than forgetting about it.
Benefit of a depreciation schedule table example
| Year | Property Value | Cost Base | Depreciation | Tax Saving |
|---|---|---|---|---|
| 0 | $1,000 | $1,100 | - | - |
| 1 | $1,050 | $1,060 | $40 | $18.8 |
| 2 | $1,103 | $1,020 | $32 | $15.0 |
| 3 | $1,158 | $988 | $26 | $12.0 |
| 4 | $1,216 | $962 | $20 | $9.6 |
| 5 | $1,276 | $942 | $16 | $7.7 |
| Total | - | - | $134 | $63.1 |
Calculation Comparison
| Method | Capital Gains | CGT Payable | Tax Deduction | Total Tax |
|---|---|---|---|---|
| Do Nothing | $76 | $17.9 | $0 | $17.9 |
| Depreciation Schedule | $234 | $55.0 | $63.1 | -$8.1 |
| Benefit | - | - | - | $26.0 |
All figures in thousands. Property value increases 5% annually. Depreciation at 20% diminishing value on $200k equipment. Tax saving at 47% rate. Year 6 sale with $100k selling costs. CGT calculated with 50% discount and 47% tax rate.
There are several categories: capital works (structural elements), plant & equipment (fixtures and fittings), and low-cost items.
Types of Depreciation
| Type | Rate | Life | Method |
|---|---|---|---|
| Structural & Building Structural improvements and building works |
2.5% | 40 years | Straight Line |
| Solar Solar panels and solar systems |
10% | 20 years | Diminishing Value |
| Sheds & Pergola Sheds, pergolas, and outdoor structures |
13.33% | 15 years | Diminishing Value |
| Kitchen & Bathroom Kitchen and bathroom renovations |
16.67% | 12 years | Diminishing Value |
| A/C & Blinds Air conditioning and blinds |
20% | 10 years | Diminishing Value |
| Floors & White Goods Flooring and white goods |
25% | 8 years | Diminishing Value |
| Rugs & Appliances Rugs and appliances |
40% | 5 years | Diminishing Value |
| Accessories Accessories and fittings |
100% | 2 years | Diminishing Value |
| Cars Motor vehicles |
25% | 8 years | Diminishing Value |
| Small Business Pools Pooled assets for small businesses |
15% (1st year) 30% (later years) |
Variable | Pool Method |
| Low-cost items < $300 Items under $300 - immediate deduction |
100% | Immediate | Immediate Deduction |
Note: Diminishing Value rate = 200% ÷ years. For income-producing assets, Diminishing Value is typically used. For non-income producing assets, Straight Line (Prime Cost) may be used instead.
Small businesses are able to pool their assets together for simpler depreciation; writing off 15% in the first year, and 30% in later years until the pool is less than $20,000 at which point the entire pool can be written off.
Depreciation Schedule
A depreciation schedule is the official document for defining the asset starting value, useful life, method and starting date.
As soon as you buy a property it's good to get a quantity surveyor to give you a depreciation schedule. Should in the future you ever decide to rent out a part of the property you can then claim depreciation.
FAQ
Typically $5,000-$15,000+ annually depending on property value. The exact amount depends on the property's age, value, and fixtures.
Recommended for accuracy and compliance. Professional schedules ensure you claim all available deductions and meet ATO requirements.
Capital works are building structure (2.5% rate), plant & equipment are removable items (varying rates based on asset life).
Yes, if properly classified and documented. Renovations may include both capital works and plant & equipment components.
From the day the property is first available for rent after the works are finished. Pro-rate the first/last year by days.
Yes for capital works (2.5%/40y), using a Quantity Surveyor (QS) estimate if the actual cost is unknown.
No. For plant & equipment, you choose once per asset (Prime Cost or Diminishing Value) when it's first used, then stick with it. Diminishing Value is higher upfront depreciation so often better tax minimisation method. If you are not currently renting out the peoerty then using prime cost is better as it will maintain more of the deductions for later years.
Only the income-producing days count as taxable deductions, the depreciation occurs regardless.
Apportion by a reasonable basis (typically floor area × days). Common areas are shared proportionally.
Yes—put eligible low-cost/low-value plant into a low-value pool (rates are set; it accelerates claims). Capital works never go in the pool.
Often yes for plant items ≤ $300 used to earn income (and not part of a set). If it's part of a set over $300 total you need to depreciate it.
Repairs (fixing wear & tear) are usually immediate deductions. Improvements (better/extra functionality) are capital. If you are currently renting out then repairs are more tax effective. If you are living in it and may rent it out later then imrpveoment are better as you can depreciation the cost later.
Total depreciation claimed reduces your CGT cost base, which can increase your capital gain when you sell.
You may claim a balancing deduction for any unclaimed written-down value of that plant item when it's discarded (not for capital works).
No—claim up to the contract date (pro-rate by days).
New or recently renovated properties typically have bigger capital-works claims available for longer (close to the full 40 years). But you can't imediately say one is better than the other.
QS report, invoices, completion dates, photos/plans/DA approvals, appliance receipts, dates first available for rent, and any apportionment notes (area/days). Keep for at least 5 years after lodging the return for the sale year.