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The Australian Tax Department (ATO) recognises that as a property ages and starts to wear out, so too does the property’s value. Because of this the ATO allows property investors to claim a deduction on the depreciation of income producing properties.
There are two types of tax depreciation that can be claimed back – capital works depreciation and depreciation on plant.
Capital works allowance is based on the historical building cost and is also known as the building write-off. It is a set annual allowance and is usually 2.5% or 4% of what the building originally cost to build excluding the cost of “plant items”. However not all properties can claim this allowance.
All income producing properties however are likely to be able to claim depreciation on plant, which is essentially the removable assets of a building such as curtains, cook tops, air-conditioning and hot water systems for example. These items depreciate faster than the building and are therefore not based on the historic valuation of the building.
Overall what is being taken into consideration when a tax depreciation benefit is being calculated is the type of building, its age, use and fit out.
Tax depreciation can be difficult to understand at first but you should get in touch with a quantity surveyor or a tax depreciation specialist who can produce a tax deprecation schedule and outline for you how much depreciation you are entitled to yearly for the life of your property, or until capital improvements are made.