Claiming depreciation – choosing the method that will benefit you
You can only choose the depreciation method that is to be used to claim depreciation deductions on the fixtures and fittings within your investment property or properties once, so make sure you choose the method that is going to be most beneficial to you.
Fixtures and fittings are those items generally included in the sale of land and are usually defined in your contract. Items commonly captured by such terms include ovens, stoves, air conditioning units and curtains. You can make a depreciation claim in respect of these items each year using either the prime cost method, or the diminishing value method. While both methods do depend on an asset’s effective life span, the amount you are entitled to claim, and thus your cash flow position in a given year, will vary depending on the method you choose.
The diminishing value method will see you being entitled to relatively large claims over the first few years, followed by smaller deductions over later years, as the method used to calculate the deduction available in a given year depends on the reduced written down value of an asset, which itself diminishes over time. In comparison, the prime cost method will see you claim a relatively lower, consistent deduction each year as a much lower rate of depreciation is applicable.
The method that is right for you might not be so obvious, and each has their own benefit. If you’re wishing to hold a property for a short period of time, build your investment portfolio quickly, or perhaps budget for some much needed property renovations, then the diminishing value method might be the method for you. However, if you would prefer to claim more consistent deductions over a longer period of time, creating a more consistent cash flow, then perhaps the prime cost method better suits your needs.
You need to put a lot of thought into choosing your depreciation method. While it may sound good to be entitled to greater deductions now, such choice may not benefit you in the long term. You can only choose one depreciation method to claim depreciations deductions, so make sure you choose the method that is fits your investment strategy and works well with the types of fixtures and fittings you are using it for. The experienced team of accountants and tax agents here at The Quinn Group can walk you through this decision. Call (02) 9223 9166 to book an appointment or submit an enquiry online.