WHAT IS A DEPRECIATION SCHEDULE?
A depreciation schedule is an essential indicator of the loss of value of assets over a period of time to every business/organisation. It maintains a record of all long-term assets and organises data that shows how they’ll depreciate over the years. Factors like date of purchase, initial cost, replacement value, period of use, etc., influence the calculation of an asset’s depreciation expenses, depending upon the accounting method you have chosen.
WHY IS A DEPRECIATION SCHEDULE IMPORTANT?
A depreciation schedule is an essential document for all businesses since it can be utilised to report the use of assets to all stakeholders. It is a comprehensive report that includes the historical value of all long-term assets in a firm and can draw a detailed comparative study in contemporary times. Stakeholders can use this data to be better prepared for when it is time to replace business assets. It is a good idea to invest in formulating a depreciation schedule because it gives businesses the ability to track when and what value is being deducted and helps them stay ahead of the curve.
WHAT DOES A DEPRECIATION SCHEDULE INCLUDE?
Irrespective of what accounting method you choose to compute a business’s depreciation schedule, the following factors generally influence its outcome:
- Description of asset
- Date of purchase
- Expected life
- Method of depreciation
- Salvage value
- Current year depreciation
- Cumulative depreciation
- Netbook value = Cost – Cumulative Depreciation
All such factors contribute to the cumulative calculation of the schedule. A thorough and well-made depreciation schedule that is conscious of the data as mentioned above will successfully be able to provide:
- A breakdown of all building allowance costs;
- A breakdown of all assets costs;
- Average, impactful shelf life of each asset described;
- The expected rates at which depreciated items can be replaced;
- A breakdown of the amount that can be claimed per annum based on the financial year-end.
In the simplest terms, as an asset such as a building gets older, its value decreases since its structure and other significant components experience considerable wear and tear. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this depreciation for a tax deduction.
In such circumstances, for investment property particularly, a depreciation schedule plays an equally important role. As a property owner, an individual can greatly benefit from maintaining a stable cash flow by claiming depreciation deductions in taxation- which is the purpose of creating a depreciation schedule. For instance, according to BMT Australia, residential investors save an average of around $9,000 through depreciation deductions in the first financial year and more than $40,000 for the first five years. Other surveys suggest that while investors in Australia remember certain claims for tax benefits such as interest on their loans, council rates, property management fees, and repairs and maintenance costs, depreciation somehow does not make the cut.
THE PROCESS OF COMPLETING A PROPERTY TAX DEPRECIATION SCHEDULE IN AUSTRALIA
In order to make depreciation schedules for your property and consequently claim maximum beneficial deductions, you can always approach tax accounts that would guide you through the whole process. In Australia, the following is the general overview of creating a property tax depreciation schedule via a firm:
Basic Information is Collected
The firm would require you to provide some basic data that would appear on your depreciation schedule, such as your name, address of the property, purchase information (as stated above), and details about your property manager.
When all such details are in place, a property inspection is conducted by a licensed professional. Their primary responsibility is to assess, measure and photograph all long-term depreciable assets on your property, such as the flooring, light fittings, tapware, etc. After a thorough inspection, the surveyor would record the data of all the assets on your property that can be depreciated. The supra-local office near your property would then work on this compiled data to create a depreciation schedule.
Depreciation Schedule Created
A depreciation and specialist tax team are generally tasked with preparing your tax depreciation schedule. They review and work with the data compiled in the previous stage of the property inspection. Such teams are very efficient in structuring this document, and it saves you a lot of time when experts in the field can get the entire job done with utmost dedication. You can then use this well-made depreciation schedule to reap a multitude of tax benefits in the form of deductions.
IN AUSTRALIA, WHAT CAN PROPERTY OWNERS CLAIM IN TERMS OF DEPRECIATION DEDUCTIONS?
According to the regulations in Australia, depreciation deductions are distinctly categorised in two, which depends on the kind of assets you own. To claim profitable tax deductions on your property, here are the two categories you need to know about:
Division 13 capital works allowance
This is primarily related to fixed, long-term assets of your property. Under this type of depreciation, the deduction is associated with all claims that result from the natural process of wear and tear to the property’s structure and other relevant fixed assets over a specific period. Items like the roof, walls, flooring, bathroom tubs and toilet bowls, kitchen cupboards, cabinets, etc. Legislation under this category states that any residential property where construction began after September 15, 1987, automatically makes its owner eligible for the capital works tax deduction. Other guidelines state that such deductions can be claimed at 2.5% p.a. for 40 years. Additionally, for owners of properties that were constructed before 1987 in Australia, they should actively look for updating and regulating such buildings to claim the capital works allowance since such properties are most likely to have had renovations that make them eligible.
Division 40 plant and equipment depreciation
This is primarily related to all those assets that can be removed/ mobile assets. Easily removable fittings and equipment inside your property- such as carpets, blinds, air conditioners, hot water, smoke alarm systems, ceiling fans, and almost 6,000 recognised items by the ATO- fall under the ambit of plant and equipment depreciation. However, it is crucial to remember that each of these items is allocated an individual effective life and depreciation rate in the entire schedule. Such differences become imperative to note so that you can calculate your tax deductions to their exact value.
Additionally, people who have purchased brand-new residential and/or significantly renovated properties, commercial real estate, or have added new easily removable and recognised equipment to their existing residential/commercial (which may be second-hand) property are eligible to claim tax deductions under plant and equipment depreciation. Please note that as per the latest legislation in this regard, those who own second-hand residential properties wherein the exchange contract was made till 7:30 pm on May 09 2017, cannot claim tax deductions under the plant and equipment depreciation provision.
Depreciation schedules have proved to be important to businesses as well as property owners of all kinds. It is always wise to involve professionally trained experts that make your tax depreciation journey a smooth sail. They work in accordance with Australian law, personalise the most relevant accounting technique for individual clients and complete the task faster and more efficiently. A depreciation schedule is a must for all those who wish to save a lot on assets that don’t provide respective values to you currently and always remain a step ahead!