1. What is Depreciation?
Very briefly, depreciation is the decrease in value of an item over time. Think of the tax deduction for depreciation as compensation for wear and tear. Buildings being rented out suffer wear and tear, so do the Assets (fixtures and fittings or chattels). Depreciation is a tax deduction. Other tax deductions claimed by property investors include: council/water rates, property manager fees, interest on loans etc. Of all these property related tax deductions, depreciation is often the largest. Depending on the property, it can easily exceed $10,000 in a single year. Even older properties usually have something worth claiming – it’s always worth a phone call to find out if a Depreciation Schedule is viable.
2. What is a Tax Depreciation Schedule?
This is simply a document (ideally prepared by an appropriately qualified person) that sets out how much depreciation you can claim on your property every year from when it was first available to rent. The term ‘Tax Depreciation Schedule’ is often shortened to just ‘Depreciation Schedule’. Sometimes people refer to them as a ‘Quantity Surveyor Report’. Or a ‘Capital Allowances Schedule’.
3. How is a Depreciation Schedule different from a valuation?
A valuation is an estimate of what a property would fetch if it was sold i.e. it’s a market value. A Depreciation Schedule is completely different. To put together a Depreciation Schedule, a Quantity Surveyor needs to work out what a property cost to build when it was built. That is the starting point. Then the QS needs to put a value on the individual Assets (fixtures and fittings) in the property.
There are valuation companies who are now offering Depreciation Schedules. The ATO states specifically that valuers do not have the requisite qualifications to estimate construction costs, so presumably valuers who offer Depreciation Schedules are collecting data that is then sent to a quantity surveyor (hopefully) for them to cobble something together. We think that it is better if the person who actually visits the property is the person who costs it up. The Australian Institute of Quantity Surveyors (AIQS) agrees.
4. How much depreciation will I get?
This is probably the question we get asked more than any other. And we completely understand that it is the thing people most want to know. Thankfully, most people in turn understand when we tell them that it is very hard to estimate anything without seeing the property. As a rule, newer properties tend to have more depreciation. The amount of depreciation can be anywhere from $1,000 to $15,000 in the first year, depending on the property. We do have an estimator tool that people can use to get an idea of the depreciation a particular property might produce. It’s a pay per use tool, but we deduct the fee from the Depreciation Schedule price if people get a full Depreciation Schedule on that property down the track.
We also have a guarantee:
‘We guarantee that the depreciation in the first full year will be more than our fee, or your Schedule is free.’
5. How long does a Depreciation Schedule run for?
There is no set length. Some run for 1 year. And at the other end of the scale are the ones that run for 40 years. We’ve even seen Llifetime Schedules’, which always makes us smile. Once the Assets (fixtures and fittings) are written off in the early years, the amount claimable in subsequent years will be the same each year. So a ‘Lifetime Schedule’ is just a marketing gimmick (and a waste of paper). And of course, if you have to make changes to the property, like replace the hot water unit, your Schedule needs to be updated anyway. Our Schedules run for 20 years, but I guarantee nobody will even use one for that long. And when our clients do need to add the odd item, we generally update their Schedules free of charge.
6. When should I get a Depreciation Schedule?
Obviously, you can’t do much till you settle and have the keys.
The best time is in the summer when we are quiet. Our Quantity Surveyors are more flexible in the quiet season and can better fit in with tenants because in most cases they are going to have to visit the property. Of course, if the property is vacant, that’s even better.
We know that it is tempting to wait till as close to tax time as possible. But the worst time to think about it is when you have booked an appointment with your accountant and need the Schedule in a hurry. That is guaranteed to be the week your tenant is away.
7. Can Depreciation Schedules be backdated?
Yes, we do this all the time. More than half the Schedules we do are backdated. And if, after we have done your Schedule you (and your accountant) decide to kick it off on a later date, it’s easy for us to change and reissue it – no charge, of course.
8. Are Depreciation Schedules transferable?
Yes. A Depreciation Schedule is something that pertains to a property, rather than a person. That is why providing them does not really constitute ‘advice’. Our Depreciation Schedules don’t even have a name on them, just an address. If you are selling a property, having something that tells a prospective buyer how much depreciation they will be able to claim if they rent the property out, will be a good selling tool.
On the flip side, if you purchase a property and are offered a Depreciation Schedule, accept it gratefully because it will be a good starting point for you. Many of the Assets will have been written-off, so you will want to get them recalibrated, but that’s not a problem (assuming your contract of sale does not mention the written-down value of Assets).