Tax Deductions in Australia

In Australia, there are two types of tax depreciation:

Capital Works deductions for buildings and structures (Division 43),

Capital Works deductions for buildings and structures vary depends on the building type and built year. Residential properties built after 18 July 1985 can be claimed at least 2.5 percent of the original building cost for Capital Works deductions for buildings and structures. The building cost includes actual costs incurred on the whole construction process not only the builder’s Contract amount plus all variations, but also the design fee, interest paid, Council’s fee or any cost outside of the builder’s contract, such as fencing, drive, mailbox, clothes line, floor covers, hard landscaping and others. Construction expenditure does not include the value of an owner contribution such as professional fee and labor. For instance, if the owner chose to paint the building himself, then the owner can only claim the material part. The owner’s own labor or time is ignored by the law. Moreover, the cost of acquiring the land and the costs incurred preparing the site for construction are also specifically excluded. Keep in mind that any renovation, extension or alteration completed after 27 February 1992 is also depreciable under a new 40-year cycle regardless of the building’s age.

Plant and Equipment allowances (Division 40/42).

Plant and equipment allowance has no time limit and can be claimed at any age of the building such as items. However, their depreciable ratio varies depending on the building type. For example, carpet in a commercial building can be depreciated quicker than one in a residential building even if they are the same. The reason for this is typically, the carpet in a commercial building would wear out quicker. Plant and equipment allowance takes the majority of the annual depreciable entitlement, particularly on old buildings. They include not only assets fixed to the building structure such as floor covers, hot water systems, appliance, water pumps, window curtains, blinds and others but also free-standing assets such as loose furniture and fit outs. They are depreciated at an accelerated rate that is in excess of the flat rate utilized in Division 43. Moreover, second-hand plant and equipment are also depreciable.

ATO uses two tax depreciation Australia schedules:

1. Prime Cost: This method deducts an identical amount each year for the useable life of the asset. The formula is: Asset Cost x (Days Held/365) x (100%/Effective Life). The ‘Days Held’ component allows you to allocate a portion of depreciation to items purchased mid-financial year.
2. Diminishing Value: This method allocates more depreciation at the beginning of the schedule. The formula is: Base Value x (Days Held/365) x (200%/Effective Life). Base Value replaces Asset Cost, and is recalculated each year by deducting the depreciation from the previous year’s Base Value.

Claiming tax depreciation Australia on your business assets is generally compulsory. Moreover, you can decide not to depreciate a particular asset. Once you've elected not to depreciate an asset you can't claim tax depreciation on it in years to come.