Capital allowance is one of the largest non-cash tax deductions that property investors can leverage. However, not all investors are fully aware of this tax break, or they have a common misconception that their property is not qualified for this tax relief. Read on to learn more about capital allowances and how you can claim this tax relief for your investment property.    

What is capital allowance?

Before discussing what capital allowance is, we must first understand tax depreciation.

In accounting, depreciation refers to the ageing and wearing out of an asset and its respective decline in value over time. For property investors, this means tax deductions you can claim as an expense, for the ageing, wear-and-tear of your investment property and the included items in the building. It is one of the biggest tax deductions that can be claimed by property investors. 

When claiming depreciation on your investment property, there are two factors that will be considered. According to the Australian Taxation Office (ATO), properties used for income-generating purposes may claim deductions for Division 40 (Plant and Equipment) and Division 43 (Capital Works). 

Plant and equipment are items that are fixtures and fittings, generally known as removable assets. Each qualified item has a set limited effective life (how long before an item needs to be replaced) measured in years and determined by ATO. Items under this category can be depreciated either by diminishing value or prime cost method. The decline in the value of these items are based on the cost and effective life of the asset and not the actual change in value.

Meanwhile, capital works (or building write-offs) refers to the depreciation of the structure of the building itself, including irremovable items on the property. This includes driveways, fencing, garage, paint, roofing, tiling, walls etc. Depreciating rates are either 2.5 per cent or 4 percent, depending on the use of the building and construction commencement date. The deductions for Division 43 are called capital allowances or capital work allowances.

Can I claim capital allowance on my investment property?

Contrary to what some investors think, you can claim capital allowance on almost all investment property, whether it is a new or second-hand property.

Generally, a new investment property is seen to provide a higher total base tax entitlement. This is because deductions through depreciation of items under Division 40 are now only available to any new investment property bought after 9 May 2017. 

But investors that have purchased second-hand or older properties can still claim capital allowance on the constructed works (the building itself) and any structural improvements or additions that are made to the property over time. However, any assets that have been acquired through the purchase of the property will not be qualified for annual depreciation claims.  

How can I claim for capital allowance?

To claim capital allowance, you need to have a capital allowance and tax depreciation schedule for your investment property. It can only be carried out by a qualified and professional quantity surveyor that is registered as a tax agent with the Australian Taxation Practitioners Board. Remember that the ATO does not consider accountants, real estate agents or valuers as appropriately qualified to estimate construction costs.  

A quantity surveyor will provide you with a detailed report of the depreciable assets (both capital works and plant and equipment assets) in your investment property and how much you can claim for depreciation when it is time to submit your tax return. 

How much can I claim for capital allowance?

The amount you can claim for capital allowance will depend on your investment property. The deduction rates applicable to your property varies between buildings and for their intended purposes. The ATO provides a guide on how much you can claim for your property and the period over which you can claim deductions here. 

Conclusion

Many investors miss out on tax breaks due to the misconception that capital claims are not applicable to older or second-hand properties. While capital allowance and depreciation tax breaks are higher on newer properties, these tax deductions are available for all types of properties.