The government introduced the Rental Property Depreciation deduction in 1985 and legislated it through the Australian Tax Office, to encourage the construction industry to increase residential property construction and provide rental accommodation for the increasing population. The legislation allowed property investors to claim large non-cash deductions, which offset assessable rental income. This created what we call negative gearing property/asset, where the non-cash deductions created a loss for income tax purposes, reducing taxpayers' assessable income.
Any property constructed post-17 July 1985 qualified for a 4% construction deduction, which was reduced to 2.5% from 16 September 1987. On top of this deduction, property investors can claim a deduction for internal fixtures and fittings that do not form part of the capital works deductions (Division 43). The deduction for rental property plant and equipment (Division 40) allows the property investor to claim higher tax deductions.
The depreciation deductible amount depends on several factors. For instance, from 9 May 2017, second-hand property that is not new cannot qualify for the Division 40 deduction, unless the property was extensively renovated. If the property was old but renovated pre-purchase and the previous owners provided construction costs for the renovations, the construction cost must be used. Maximising rental property deductions through depreciation allows property investors to increase the property's cash flow.
