What is a tax depreciation schedule?

A tax depreciation schedule is a report that lists the deductions the owner of an income-producing property can claim for the wear and tear of the building and its contents, year by year. It is prepared once, usually soon after you buy or finish building, and your accountant uses it every year to fill in the rental schedule of your tax return.

The deductions are non-cash: you do not spend anything to claim them. They reduce your taxable income, so their value to you is the deduction multiplied by your marginal tax rate. The guide to how much you can claim works the figures for a sample house.

Two kinds of deduction, under two parts of the Income Tax Assessment Act 1997. Division 43 capital works deductions cover the building itself and structural improvements such as driveways, fences, retaining walls and pools, generally at 2.5% of the construction cost a year for 40 years where a building was begun after 15 September 1987 or a structural improvement begun after 26 February 1992. Division 40 covers plant and equipment, the removable assets: carpet, blinds, hot water systems, ovens, cooktops, dishwashers, split systems, exhaust fans and smoke alarms, each over its effective life as determined by the Commissioner of Taxation.

A good schedule shows both methods the law allows for plant (diminishing value and prime cost) side by side, so you can choose, and sets out the cost, effective life, rate and deduction for every item.

Whenever you own a property that earns rent: a house, townhouse, unit or apartment, new or established. For a new property the deductions are largest. For an established one, the building can still be claimed if construction began after 15 September 1987, and so can anything you add or renovate, even on a property built before 1987.

Deductions can be claimed from the day the property is first available for rent. If you have owned it for a while without a schedule, your accountant may be able to amend recent returns.

The contract of sale or building contract, the settlement date, and anything that shows the property and its contents: an inspection report, the agent's listing, floor plans and photos. Invoices for anything you have added or replaced since are useful too. Where a cost is not documented, it is estimated from the floor area, the construction (its build quality and storeys) and the year built, and the estimate is labelled as such in the report. The guide to what to send goes through each document, and how to photograph each room.