Expert Insight:
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
For property investors, improving after-tax returns is a key objective. One of the most powerful – and most underused – tools available is tax depreciation. By claiming depreciation, you can legitimately reduce your taxable income by recognising the gradual wear and tear of your investment property and its assets over time.
While tax time can feel daunting, it also presents a valuable opportunity. With the right approach, investors can recover a significant portion of the costs associated with holding and managing an investment property, boosting both cash flow and long-term performance.
1. What Is Depreciation?
Depreciation is the decline in value of an income-producing property and the assets within it as they age and are used.
For investors, it can be claimed on:
- The building structure (capital works)
- Fixed assets – for example, cabinetry, tiles, and built-in items
- Plant and equipment – the easily removable and mechanical assets such as appliances, carpet, blinds, air conditioning, etc.
Depreciation is typically the second-largest tax deduction available to property investors after loan interest. Yet many owners fail to claim it or don’t claim the full amount they’re entitled to.
A key advantage:
- You don’t need to spend any extra money in the current year to claim it – it’s a non-cash deduction.
2. How Tax Depreciation Benefits Property Investors
Leveraging depreciation correctly can significantly improve the performance of your investment.
Meaningful Tax Savings
When you claim depreciation, your taxable income is reduced. That generally means:
- A lower tax bill
- More of your rental income retained each year
This can be particularly powerful for higher-income investors who are taxed at higher marginal rates.
Better Cash Flow
Because depreciation reduces the amount of tax you owe, it effectively increases your after-tax cash flow.
More surplus cash can then be used to:
- Cover holding expenses more comfortably
- Build a buffer for vacancies or interest rate rises
- Reinvest into additional assets or debt reduction
Higher Overall Returns
Depreciation helps you offset rental income with legitimate deductions linked to the building and its contents. This can:
- Lift the net yield on your investment
- Improve your overall return when viewed on an after-tax basis
Compounding Long-Term Savings
On properties with strong depreciation allowances, the benefits accumulate year after year.
Over the life of the investment, this can add up to tens of thousands of dollars in tax savings, strengthening your long-term wealth strategy.
Supporting Property Upkeep and Value
Depreciation doesn’t just help on paper. Deductions can help offset the cost of:
- Ongoing maintenance
- Upgrades and improvements
In turn, this can help your property:
- Remain attractive to quality tenants
- Maintain or increase its market value over time
Fuel for Portfolio Growth
By freeing up cash through tax savings, investors can:
- Reinvest into renovations
- Fund deposits for additional properties
- Accelerate debt reduction
This creates a cycle where depreciation supports both cash flow today and portfolio growth tomorrow.
3. Tips for Maximising Depreciation Deductions
Australia’s leading tax depreciation specialists, BMT Tax Depreciation, recommend the following steps to get the most from your depreciation claims.
a) Engage a Specialist Quantity Surveyor
The first step is to organise a tax depreciation schedule.
A quantity surveyor who specialises in tax depreciation will:
- Inspect the property (physically, where required)
- Identify all depreciable assets
- Ensure the schedule complies with Australian Taxation Office (ATO) guidelines
A BMT Tax Depreciation Schedule:
- Lists all eligible deductions for the life of the property (typically up to 40 years)
- Is 100% tax deductible in the year it’s purchased
To request a quote for your property, visit BMT Tax Depreciation at:
bmtqs.com.au
b) Amend Previous Tax Returns
If you haven’t been claiming depreciation, you may be able to amend up to two previous tax returns (subject to ATO rules and your circumstances).
This allows you to:
- Recover missed deductions
- Correct past omissions or errors
To do this, you’ll need:
- Proper records and documentation
- A detailed depreciation schedule to substantiate your claims
Having a schedule in place makes it simpler for your accountant to lodge amendments and ensure everything is accurate and compliant.
c) Claim Partial-Year Deductions
You don’t have to own or lease your property for a full financial year to claim depreciation. The ATO allows:
- Pro-rata claims for the number of days your property was available for rent
This is particularly relevant if:
- You purchased the property part-way through the year
- Your home is used as a holiday rental or short-term let for only part of the year
d) Use Rules That Bring Forward Deductions
Certain ATO rules and “pools” can help you claim some deductions faster, such as:
- Low-value pooling
- Immediate write-off for qualifying low-cost assets (subject to current ATO thresholds and rules)
A specialist quantity surveyor can identify which items qualify for accelerated depreciation and incorporate this into your schedule.
e) Know the Difference Between Repairs, Maintenance and Improvements
Different tax treatment applies to:
- Repairs and maintenance – generally deductible in full in the year the cost is incurred
- Capital improvements – such as major upgrades or additions, which must usually be depreciated over time
It’s common for previous owners to have completed renovations that still qualify for deductions for up to 40 years from the date construction was completed.
Site inspections are vital because:
- A trained quantity surveyor can identify these prior works
- They can accurately estimate construction costs where invoices are not available
- These estimates form the basis of legitimate depreciation claims
4. Improving Immediate Cash Flow With a Tax Withholding Variation
If you prefer to access your tax benefits throughout the year rather than waiting for a refund at tax time, you may be able to apply for a PAYG withholding variation.
This allows you to:
- Reduce the amount of tax withheld from your salary
- Increase the net amount you receive in each pay cycle
Step 1: Obtain a Tax Depreciation Report
Your quantity surveyor’s report sets out:
- The depreciation schedule
- Capital allowance amounts you’re entitled to claim each year
You can request a tax depreciation schedule quote via BMT.
Step 2: Gather Rental Income and Expense Details
Provide your tax accountant with:
- A breakdown of rental income for the year
- All associated expenses (loan interest, rates, insurance, management fees, etc.)
- Your depreciation schedule from the quantity surveyor
Step 3: Ask Your Accountant to Prepare a PAYG Withholding Variation
Your accountant can then:
- Complete a PAYG Withholding Variation application for you
ATO information and forms are available here:
https://www.ato.gov.au/forms/payg-withholding-variation-application/
Once approved, the ATO will issue a notice that you can:
- Give to your employer or payroll department
- Use to reduce the tax taken from each pay
In practice, this means:
- You receive more cash in hand during the year
- It can be easier to meet your mortgage and other holding costs in real time
Conclusion
The first year of owning an investment property can feel financially demanding, with setup costs and tax benefits often delayed until your return is lodged. Over time, though, a well-managed property – supported by smart tax strategies – should become easier to hold and may become cash flow positive.
Key ingredients for long-term success include:
- Disciplined financial management
- Active oversight of your property and its performance
- Making full use of tools like tax depreciation
Depreciation is a powerful way to:
- Reduce taxable income
- Improve cash flow
- Boost long-term returns and portfolio growth
It’s important to work with a qualified tax professional or financial adviser who understands property to ensure you apply the rules correctly for your specific circumstances.
Contact Australia’s Leading Tax Depreciation Specialists
BMT Tax Depreciation undertakes physical site inspections where required to ensure that every eligible deduction – including past renovations – is identified and correctly claimed.
If you want to maximise the depreciation claims on your investment property, contact BMT on 1300 728 726 or Request a Quote via their website.