Depreciation using straight line method and diminishing value

Hi all,

Just to clarify how accountants cater for property depreciation, my understanding is that there are 2 main depreciation methods - straight line (linear method) where depreciation is claimed based on same % amount each year (e.g. 2.5% over 40 year period), and diminishing value method where the value of the asset depreciates based on a certain percentage per year (e.g. 3% forever) and where the depreciation amount is basically the difference between each year and continues till infinity.

What I wanted to better understand was how depreciation works across a whole property investment portfolio with multiple depreciation items.

Specific questions below:
* Lets suppose I own 8 properties. And assume each property has 2 depreciation items - one for Capital Works (building depreciation) and another one for Fixtures/Fittings. Am I allowed to use different depreciation methods for each property - for example, for a particular property, can I use the diminishing value method for building/capital works, and straight line method for fixtures fittings? Or can I only apply one consistent method for all depreciation items for each specific property
* Continuing the example of owning 8 investment properties - lets assume I as an individual am the sole owner of these 8 properties. Further to my above question, do I need to use the same depreciation method such as straight-line for all 8 properties, or can I apply different depreciation method for each property - e.g. straight line for 1 property, and diminishing value for the other?
* Finally, if I apply a depreciation method for one particular financial year (say 2019/2020), do I need to stick with that same method for all years across all my properties?

The questions above are basically around flexibility and how I can account for the depreciation both for a single property, and across multiple properties in the portfolio - and am I restricted regarding how I apply this over the years, and if so, what are these restrictions.

Thanks.

 

Each property isn't separate asset - you choose the depreciation method for each property then you're tied to it. Each can be different but you can't change.

 

capital works is 2.5% per year for 40 years, no choice to change it.
plant and equipment could be diminishing value method or prime cost method. Each over the life of the asset, not forever.
Plant and equipment is generally only available for deductions where brand new assets are involved.

 

Division 40 depreciation allows a taxpayer a choice of either dim value or prime cost for each asset. In practice thats a bit silly and almost every taxpayer adopts a choice of one method or another and once it is selected that method cannot change. Unless there is a unusual reason to defer tax deductions until future years I always advocate diminishing value as it bring forward more deduction than prime cost. Over the full life of these assets ( typically 10 years ?) there is no total difference to either method. Dim value also accelerates the speed at which some assets can enter the pool which further accelerates their write off.

Reasons to use DV over PC

• Faster deductions
• Far higher initial deductions
• What happens if the rules change ? Early claiming gets the deduction early
• May assist assest to be w/off or w/down faster and at its worse case that may accentuate a CGT amount, which is then discounted. You are likley 50% better off at its worst.

Div 43 cap allowances is always prime cost
Borrowing expenses are prime cost ie total amount divided by loan term or 5 years eg 60 months

When may PC be a better choice ?
This used to once suit a property that might not be initially tenanted but would in say 2-3++ years. It would defer the deductions from years 1-3 for future use. However the impact of lost Div 40 now acts as a disincentive to this approach anyway as there is no deduction for Div 40 for used assets now. But the PC method as a deferred CGT loss may be higher than using the DV basis and at the time of the asset being sold or scrapped this choice can occur.

 

Thanks Scott - so just to confirm, in a portfolio of 8 investment properties, I am allocated to use a different depreciation method for each individual property, but I am not allowed to use a different depreciation method within the same property (e.g. straight line or capital works) - is this right?

Secondly, you mentioned that each property isn't a separate asset - just clarifying what you mean?

Thank you.

 

Thanks Terry.

 

Typo - each is a separate asset.

 

Got it, thanks.

 

Each asset within a property can use a different methiod. When referring to asset I refer to the Div 40 item, not the property which is a separate CGT asset.
Typically when using a QS report you adopt one method for all assets being depreciated and it is either Dim Value or Prime Cost. If you add further assets (new carpet) you can choose the method that differs from the QS report if you want and the tax agent may add a schedule into the return.