PP&E Depreciation and the Low Value Pool
Plant and equipment (PP&E) depreciation lets you claim a tax deduction for the decline in value of – you guessed it – plant and equipment.
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This covers tangible assets within your investment property, including items like appliances, carpets, and furniture—basically, anything that’s not part of the building’s structure itself (Learn more in Lesson 3).
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The Australian Taxation Office (ATO) allows you to choose between two common methods of depreciation:
1. Prime Cost (Straight Line) Method: This method spreads the asset’s cost evenly over its effective life.
Asset Cost x (Days Held / 365) x (100% / Effective Life)
Example
If an asset costs $10,000 with an effective life of 10 years, you’d generally claim $1,000 each year (assuming full use of the asset throughout the year).
Year 1-10: $10,000 x (365/365) x (100%/10) = $1,000
2. Diminishing Value Method: This approach allows you to claim a higher deduction in the earlier years.
Base Value x (Days Held / 365) x (200% / Effective Life)
Example
Using the same $10,000 asset over 10 years, the first-year deduction might be higher than $1,000, with smaller amounts in later years as the asset’s book value declines.
Year 1: $10,000 x (365/365) x (200%/10) = $50,000 x 20% = $10,000
Year 2: $40,000 x (365/365) x (200%/10) = $40,000 x 20% = $8,000
Year 3+: The depreciation calculations continue until the final value reached zero.
These methods ensure that the tax deduction reflects the way assets actually wear out or become less valuable over time.
Effective Life Lists can be found on the ATO website.
Restrictions on Depreciation for New PP&E:
Introduced in 2017, limitations apply to claiming depreciation on certain P&E acquired after 7:30 pm on May 9, 2017, for rental income purposes.
Deductions are generally restricted if the P&E meets any of these criteria:
- Previously used by another taxpayer (excluding trading stock).
- Used in the taxpayer's residence (current or prior year).
- Used for non-taxable purposes (except occasional use).
Low-Cost Asset Exception
A low-cost asset exception allows immediate deduction for assets costing $300 or less.
Refer to the ATO fact sheet “Capital allowances – $300 immediate deduction tests” for details.
Low Value Asset Pool
The depreciation of certain low-value and low-cost assets can be calculated by putting them into a ‘low value pool’ and then depreciating them at a set annual rate.
For many small assets, managing individual depreciation schedules can be cumbersome. The ATO offers a solution called the Low-Value Pool. This lets you group assets that meet certain criteria—typically, items costing less than a set threshold (for instance, less than $1,000 after adjustments)—into a single pool.
The two types of assets that can be placed into a low value pool are:
1.
Low Cost Asset - which is a depreciating asset that cost less than $1,000 (after GST credits and adjustments) at the end of the financial year the asset started to be used.
2.
Low Value Asset - an asset that does not fall into the low cost definition, but has an opening adjusted value of less than $1,000 (using diminishing value method of depreciation).
Once pooled, the depreciation rate is set: in the first year, you typically claim 18.75% of the pool’s value, with a higher ongoing rate of 37.5% in subsequent years. This simplified approach means you don’t have to track each low-cost asset individually, yet you still receive a tax benefit for their decline in value.
Rules for P&E Depreciation:
- Once a Low-Value Pool (LVP) is established, all new low-cost assets must be pooled from that financial year. With low value assets, a decision can be made on a case-by-case basis.
- Once established, the Low-Value Pool cannot be dissolved prior to all pooled assets being fully depreciated, that once a LVP has been established it must stay in place.
- Assets which have previously been depreciated via. the Prime Cost method cannot be pooled.
- Once you select a depreciation method, you generally cannot change it in subsequent years (refer to Section 40-65 of the ITAA 1997).
Capital Works Depreciation
For investment properties, you can typically claim capital works deductions under Division 43 of the Income Tax Assessment Act (ITAA) 1997, which applies to the building’s structure and other permanent improvements.Â
Unlike PP&E, these are not movable items such as the walls, roof, windows, and even major renovations that extend the building’s life. Under the ATO guidelines, if your property (or parts of it) was constructed or substantially improved after the 27th February 1992, you can claim a deduction at a rate of 2.5% per year over 40 years to reflect the gradual decline in the structural value of your property.
The deduction is based on the original construction cost of the capital works identified in the Quantity Surveyor report, which you can request from a – you guessed it – quantity surveyor.
Depreciation can be claimed on additional works or improvements made to the property after purchase, assuming they are:
1.
Capital in nature: Enhancements or upgrades that provide a lasting benefit to the property's value or lifespan.
2.
Used for income generation: The property must be used for rental (income producing) purposes to claim depreciation.
What Qualifies as Capital Works?
Capital works include:
- New Construction or Extensions: Adding a new room, building a deck, or constructing an extension.
- Major Renovations: Upgrading a kitchen, bathroom, or converting a loft—improvements that significantly enhance the property’s functionality or value.
- Structural Upgrades: Replacing an old roof, upgrading windows for energy efficiency, or significant landscaping that improves the building’s performance.
Unlike repairs (which are generally deductible in the year they are incurred), you can’t claim them as an immediate expense. Instead, you claim a portion of the cost each year, which spreads out the tax benefit over the life of the improvement.
There are no minimum cost thresholds for claiming capital works deductions.
Complexities:
1.
Your Quantity Surveyor will account for this, however any previous capital works deductions claimed by the previous owner of a property will be removed from the cost base for the purposes of your ongoing calculations.
2.
Changing a property's designation from investment to principal place of residence (PPOR) means that depreciation deductions, including those for capital works, generally cannot be claimed during the period the property is used as a PPOR. Switching back from PPOR to investment status necessitates recalculating the remaining depreciation base, often requiring a prorated approach based on the periods of personal versus income-producing use. The transition may involve complex record-keeping to accurately apportion depreciation between the two uses, and in some cases, adjustments or recapture of previously claimed deductions might be required. Additionally, timing the change of use can affect the overall tax benefits, as the eligible depreciation deductions depend on the precise period during which the property was available to generate assessable income.
