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Your home is usually exempt from tax. But if you have an investment property there may be implications for income tax, capital gains tax and goods and services tax (GST).
Depreciation is the reduction of the value of a property due to usage over time. Of all the tax deductions, property depreciation is most often missed because it is a non-cash deduction and the investor does not need to spend money to claim it. Maximum of property investors are failing to take advantage of property depreciation and are missing out on thousands of dollars in savings. So if you can claim a deduction for the decline in value of certain depreciating assets that you acquired as part of the purchase of your property, ATO will allow you to account for this for every year.
There are two main types of depreciation you can claim in your tax return for your investment property:

  • Construction Costs;
  • Fit-Out Costs.

Construction Costs
Construction costs are classified as ‘Capital Works Deductions’ and the ATO wants you to reduce your cost base by the amount of any of these ‘Capital Works Deductions’ you have made. So you have to reduce the properties cost base by the amount of depreciation you have claimed.

Under this depreciation the deduction can be calculated using 2 methods:

  •  Prime Cost Method;
  • Diminishing Value Method. 

Prime Cost Method
Under the prime cost method, you work out the deduction for a depreciating asset by allocating the cost of the asset uniformly over its effective life. This will lead to an equal deduction in each year. The deduction for the decline in value is based on the cost of the asset.
Deduction = Fit-out Cost x (100% / Asset's Effective Life) An asset’s effective life is how long it can be used for by the property for a taxable purpose.

Diminishing Value Method
This method will produce a progressively smaller decline over time, and lead to higher depreciation claims in earlier years than the prime cost method.

Deduction = Base value x (days held / 365) x (200% / asset’s effective life)
The base value is the fit-out value at the beginning of the year. So the base value will change each year due to adjustments to account for last year’s depreciation.

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