Depreciation schedules are one of the most valuable yet often overlooked tools available to property investors looking to maximise their returns.
Surprisingly, only about 20% of investors claim the full depreciation deductions they’re entitled to.
Considering that depreciation is typically the second-largest tax deduction after loan interest, it’s remarkable how much potential savings are going unclaimed.
In this article, we’ll explain exactly what a depreciation schedule is and how it can help property investors unlock greater financial benefits from their investments.
What is a Depreciation Schedule?
A depreciation schedule is an essential part of financial planning for both businesses and property investors. It’s used to forecast the value of fixed assets (as shown on the balance sheet), the depreciation expense (reflected in the income statement), and capital expenditures (reported in the cash flow statement).
Depreciation occurs naturally over time as assets, such as buildings, equipment, and machinery, are used and gradually wear out or lose value. These types of assets, known as property, plant, and equipment (PP&E), don’t all depreciate at the same rate. A depreciation schedule helps track these changes accurately, allowing for better financial reporting and tax planning.
Typically, the schedule outlines each asset category, the method of depreciation applied (such as straight-line or diminishing value), and the cumulative depreciation for each item over time. It may also include both historical and projected capital expenditures (CapEx), providing a more complete picture of asset value.
What Can You Claim Using a Tax Depreciation Schedule?
In Australia, property investors can use a tax depreciation schedule to claim two primary types of deductions:
- Capital works deductions (Division 43)
- Plant and equipment deductions (Division 40)
What is a Capital Works Deduction?
Capital works deductions apply to the structural elements of a property. Under Division 43 of the Income Tax Assessment Act, the Australian Taxation Office (ATO) allows investors to claim a portion of the building’s construction costs over time.
This includes parts of the structure such as the foundations, walls, roof, windows, doors, and other permanently fixed elements. For residential properties, these deductions are generally available for buildings constructed after 15 September 1987. The ATO considers these structures to have a useful life of 40 years, and investors can typically claim 2.5% of the construction cost each year.
Even if you didn’t pay for the construction or renovations yourself—for example, if the previous owner added an extension or renovated the kitchen after 1987—you may still be able to claim depreciation on those works.
Unlike plant and equipment items, which may have different depreciation rates based on their use and condition, capital works deductions are applied consistently at the same rate each year over the asset’s effective life.
How to Structure a Depreciation Schedule
Creating a well-structured depreciation schedule is key to understanding how your assets change in value over time. Here’s a step-by-step guide to help you put one together:
1. Start with Sales Revenue
Begin your schedule by listing sales revenue at the top. This provides context for the capital expenditures and depreciation figures that follow. Businesses often invest in capital assets to support revenue growth, which in turn leads to depreciation over time. Below the revenue line, include a section for capital expenditures—both current and from prior periods—to track ongoing investments in long-term assets.
2. Forecast Future Capital Expenditures
Next, project your capital expenditures going forward. These projections should be based on realistic assumptions, which can vary depending on your industry or business model. You might base them on a percentage of sales, set recurring dollar amounts, or specific investments you anticipate making.
After that, create a separate section for depreciation expenses. Use historical data to help determine the appropriate depreciation method. For instance, if previous records show a consistent depreciation amount, you might continue that as a recurring value. Alternatively, using a percentage of net assets can suggest a straight-line depreciation approach.
3. Summarise Asset Activity
At the bottom of the schedule, include a summary of changes in asset balances. Start with the opening balance of fixed assets. Then, add capital expenditures and subtract depreciation expenses and any disposals or write-offs. This will give you the closing balance of assets and the net value after accumulated depreciation.
If the numbers don’t align with your forecasts, revisit your assumptions and adjust them as needed. This step ensures your depreciation schedule remains accurate and useful for future planning.
Choosing a Quantity Surveyor for Your Tax Depreciation Schedule
Selecting the right quantity surveyor to prepare your tax depreciation schedule is crucial to ensuring your report is accurate, detailed, and fully compliant with ATO regulations. Here are a few key factors to consider when making your choice:
Experience
Choose a quantity surveyor who has solid experience in preparing tax depreciation schedules specifically for investment properties. The more experienced they are, the more likely they are to identify all eligible deductions.
Expertise
Look for someone with a strong understanding of construction costs and a deep knowledge of ATO requirements. Their expertise ensures the schedule is not only thorough but also legally compliant.
Reputation
Take time to research their reputation. Read online reviews, check testimonials, or ask for referrals to gauge the satisfaction of past clients.
Qualifications
Make sure the quantity surveyor is a member of the Australian Institute of Quantity Surveyors (AIQS) and holds the necessary professional qualifications. Ideally, they should also be a registered tax agent, which adds a layer of credibility and ensures their reports meet ATO standards.
Fees
Compare pricing from different providers, but don’t just go for the cheapest option. Make sure you understand exactly what’s included in the fee—some surveyors offer more comprehensive reports and post-service support as part of their package.
Conclusion
A well-prepared tax depreciation schedule can make a significant difference to your investment property’s bottom line. By understanding what depreciation is, how to structure a schedule, and what you can claim, you’re better positioned to maximise your tax deductions and improve your cash flow.
Equally important is choosing the right quantity surveyor—someone with the experience, expertise, and qualifications to ensure your schedule is both accurate and compliant with ATO standards.
Don’t leave potential savings on the table. Investing in a professionally prepared depreciation schedule is a smart step toward making the most of your property investment.
