Depreciation claims under the microscope amid ATO scrutiny

When prepared correctly, property tax depreciation can significantly reduce taxable income, improve cash flow and support long-term investment returns. When applied incorrectly, however, depreciation claims can expose investors to Australian Taxation Office (ATO) scrutiny, resulting in amended returns, penalties and lost deductions.

Beyond rental bond data, the ATO is using a wider data-matching and third-party reporting ecosystem to scrutinise landlord tax returns, primarily to detect under-reported rental income, inflated or incorrect deductions and unreported capital gains tax (CGT) events. In this environment, depreciation claims that are inconsistent with other available data sources can attract attention, particularly where schedules are generic, outdated or insufficiently substantiated.

Overstated depreciation claims are a common trigger for ATO reviews and audits. Where errors are identified, investors may be required to amend prior-year tax returns, repay tax shortfalls and incur interest charges. In more serious cases, administrative penalties of up to 75 per cent of the tax shortfall may apply.

Common sources of depreciation errors

Most depreciation errors arise from incorrect asset classification between Division 43 (capital works) and Division 40 (plant and equipment), insufficient supporting documentation or continued reliance on outdated depreciation schedules. Misclassifying assets can distort deductions, while failing to identify improvements made by previous owners or applying incorrect effective life estimates can lead to both over - and under - claiming.

Additional risk is introduced through self-prepared or generic online depreciation schedules. While these options may appear cost-effective initially, they frequently fail to capture deductions that require a detailed on-site assessment by a depreciation specialist. Commonly overlooked items include plumbing and electrical components, historical renovations and applying the most current ATO legislation. This not only increases compliance risk but also raises the likelihood of missed deductions.

The ATO compliance standard

The ATO expects depreciation claims to be supported by appropriate professional expertise and defensible evidence. Where construction costs are unknown, only qualified quantity surveyors are recognised as having the expertise to estimate construction costs for depreciation purposes.

Taxation Ruling TR 97/25 recognises qualified quantity surveyors as suitably skilled to prepare depreciation cost estimates. As a result, engaging a registered quantity surveyor who specialises in tax depreciation is considered best practice.

How to mitigate risk and avoid penalties

To maintain compliance and reduce the likelihood of ATO scrutiny, investors and advisers should:

• engage a quantity surveyor accredited by the Australian Institute of Quantity Surveyors with specialist knowledge of depreciation legislation
• review depreciation schedules regularly, particularly after capital improvements, ownership changes or legislative updates
• maintain detailed records, including purchase contracts, construction costs and invoices for capital works, and plant and equipment assets
• align depreciation claims with broader tax strategy in consultation with an accountant

A professionally prepared and substantiated depreciation schedule prepared by a qualified quantity surveyor enables investors to claim the correct deductions, optimise returns and reduce the risk of costly ATO scrutiny. Request a quote today or call us 1300 268 628 to discuss.