Commercial Depreciation: Different Rules, Bigger Deductions
Commercial property investors often discover they have access to significantly larger depreciation deductions than their residential counterparts. There are two key reasons:
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What You Can Claim in Commercial Property
Division 43 — Capital Works
The same 2.5% rate applies for buildings constructed after 15 September 1987. However, commercial buildings often have a higher construction cost per square metre than residential, resulting in larger annual deductions.
Example: A 500 sqm commercial office with a construction cost of $1,800,000:
- Annual Division 43 deduction: $45,000 (2.5% × $1,800,000)
- At 30% corporate tax rate: $13,500 in tax saved per year
Division 40 — Plant and Equipment (No 2017 Restrictions)
Commercial property investors can claim Division 40 on all plant and equipment in the property, regardless of whether it was there when they purchased it. This includes:
Office buildings:
- Lift systems ($80,000–$500,000 per lift)
- Air conditioning and HVAC systems ($50,000–$500,000+)
- Electrical distribution boards and sub-boards
- Emergency lighting systems
- Security and access control systems
- Fire suppression systems
- Data cabling infrastructure
- Carpet tiles and floor coverings
- Window blinds and treatments
- Fit-out items (reception desk, partitioning)
- Shop fit-out components
- Refrigeration systems (grocery, food)
- Signage (where not structural)
- Roller doors and grilles
- Gantry cranes and hoists
- Racking and shelving systems
- Loading dock equipment
- Compressed air systems
- Specialist lighting (high-bay LED, etc.)
Fit-Out Depreciation
If you purchase a commercial property with an existing tenant fit-out, or if you undertake a new fit-out, the assets within it are all potentially depreciable.
A mid-quality office fit-out for a 200 sqm space might include:
- Carpet tiles: $24,000 (effective life 10 years)
- Workstations and partitioning: $60,000 (varies)
- Lighting upgrades: $15,000 (5–7 years)
- Air conditioning upgrades: $35,000 (10 years)
- IT infrastructure: $20,000 (varies)
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The QS Requirement for Commercial
Given the complexity and value of commercial fit-outs, the importance of a Chartered Quantity Surveyor's report is even greater than for residential. Without one, identifying and correctly valuing each asset type — and applying the correct ATO effective life — is essentially impossible.
Koste's commercial depreciation schedules include:
- Site inspection by a qualified quantity surveyor
- Itemised schedule of all Division 40 assets with effective life and depreciation calculations
- Division 43 assessment based on construction cost data
- Year-by-year depreciation forecast (typically 10 years)
- Audit Support Pack with asset photos, methodology, and legislative references
Tax Structures for Commercial Investment
Commercial properties are often held in companies or trusts, which changes the tax rate applied to depreciation deductions:
- Individual (income-based): 19%–47% marginal rate
- Company: 25%–30% company tax rate
- Trust distributions: Depends on beneficiary's tax rate
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Depreciation and Commercial Lease Incentives
If you provide a fit-out incentive to a tenant (paying for their fit-out), this is a capital expense that may be depreciable depending on the nature of the arrangement. Koste can advise on the correct treatment.
If a tenant installs their own fit-out, the assets belong to the tenant and are depreciated by them — but the building's Division 43 position is unaffected.
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Get a Commercial Depreciation Assessment
Contact Koste for a no-obligation quote on a commercial depreciation schedule. Given the complexity of commercial properties, our team can provide a preliminary estimate of potential deductions before you commit to a schedule.