Partial year deductions

Did you know that depreciation deductions are available even if an investment property has only been owned for a short time?

Here, BMT Tax Depreciation explains what a partial year deduction is and why they’re important. 

What is property depreciation?

Property depreciation is the natural wear and tear of a property and its assets over time. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this depreciation as a tax deduction.

There are two types of depreciation claimable. Capital works deductions (Division 43) can be claimed on the structure itself and items permanently fixed to the property. Plant and equipment depreciation (Division 40) can be claimed on assets that are easily removable from the property or mechanical in nature.  

Partial year depreciation deductions

Property investors can claim pro-rata depreciation deductions for the portion of the year that their property is either rented out or genuinely available for rent. 

To be genuinely available for rent, a property must be given broad exposure to potential tenants and in a condition that wouldn’t deter a tenant from renting the property.

Partial year deductions are common in holiday homes where tenants may only stay for short periods sporadically throughout the year such as in busier times like school holidays, New Years, and on long weekends. 

In cases where a property is used for both private and income-producing purposes, the owner is eligible to claim deductions where it is income-producing. This amount would be calculated as a percentage; if the property was used for an income-producing purpose eighty percent of the time then eighty percent of all eligible costs are tax deductible. 

Another situation where partial year deductions apply is when the property was previously used as a primary place of residence. 

Immediate write-off and low-value pooling

The immediate write-off rule and low-value pooling can be used to maximize deductions in a partial financial year.

The ‘immediate deduction’ is a straightforward incentive for residential property investors. It allows an immediate tax deduction for any new asset that costs $300 or less. For instance, if you purchase a light fitting valued at $150 for your investment property, you can claim 100 percent of the cost in the year of purchase. 

Assets that cost, or have a value, of less than $1,000 can be placed in a low-value pool. This pool unlocks depreciation sooner, as assets contained within the pool can be claimed at a rate of 18.75 percent in the year of purchase regardless of the length of time that the property has been owned and rented. After the first year, the remaining balance of the item can be depreciated at a rate of 37.5 percent per year. 

There is a difference between low-cost and low-value assets. 

Low-cost asset: a depreciable asset that has an opening value of less than $1,000 in the year of acquisition.

Low-value asset:  a depreciable asset that has an opening value of greater than $1,000 in the year of acquisition but the value after depreciating over time is now less than $1,000. This will only apply if you have previously used the diminishing value method. 

For instance, if you purchased an air conditioning unit valued at $1,700 it can be depreciated using the diminishing value method. Once its depreciable value falls under $1,000, it will then be added to the low-value pool as it’s considered a low-value asset. However, if the air conditioning unit were purchased for $950 it would automatically be added to the pool as a low-cost asset. 

It’s important to note that once an asset is added to the low-value pool it cannot be taken out. 

BMT Tax Depreciation conduct physical site inspections to ensure all tax depreciation schedules are maximized and fully compliant with current ATO regulations. 

To find out more about partial year deductions call BMT 1300 728 726 or Request a Quote

Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation. Please contact 1300 728 726 or visit bmtqs.com.au for Australia-wide service.

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