Depreciation & Capital Work Deductions

Depreciation and capital works deduction

As a landlord, you may be entitled to claim a tax deduction for depreciation and capital works on any improvements you make to a property.

A depreciation deduction claim is generally related to depreciating assets that are not affixed to the building and are functional units in their own right. The claim is based on the effective life of that specific asset. You are allowed to use the effective life provided by the tax office, or to self-assess. Naturally, you will need to be able to defend the self-assessed effective life of an asset if challenged by the tax office.

A capital works deduction claim is usually related to the building and structural improvements that are permanently affixed to the land and building. The claim is generally limited to 2.5% p.a. (or 4% depending on the date and if commercial buildings) on the construction expenditure incurred on a straight-line basis, but for some minor exceptions.

As a landlord, if you incur costs on improvements, you may only claim depreciation or a capital works deduction on the costs to the extent that the improvements are owned by you under the lease agreement.

If you do not have ownership over the improvements, you may be entitled to write off the unclaimed portion of the costs as a tax deduction, depending on the timing of when you no longer have ownership of the improvements.

If the tenant incurs costs on improvements and you subsequently assume ownership of those improvements, you are considered to have acquired those improvements for their market value when the change of ownership occurs. In reality, it is not uncommon that the improvements no longer have material value by the time the tenant moves out of the premises.

It is often not straightforward to determine whether the landlord or the tenant has ownership of an improvement. The determination of this ownership issue must be based on a clear analysis of the lease agreement and the relevant legislation of the jurisdiction involved.

See what the ATO has to say on  <Capital Works Deductions>.