Business owners investing in commercial properties can significantly benefit from depreciation deductions. These deductions, governed by the Income Tax Assessment Act 1997, allow owners to claim the decline in value of both plant and equipment (Division 40) and capital works (Division 43), effectively reducing taxable income and maximising cash flow.
How Depreciation on Commercial Property Works
For commercial properties, depreciation is split into two categories: Division 40, which covers plant and equipment, and Division 43, which pertains to capital works. Plant and equipment include items like carpets, air conditioning systems, and office fixtures. Capital works refer to the building's structure, such as walls and ceilings. A common misconception is that only residential properties benefit from depreciation; however, commercial properties often have more extensive and valuable assets eligible for such claims.
How This Works in Practice
Consider a business owner who has purchased a commercial office space in Melbourne for $1.5 million. The property includes modern office fittings and a well-structured building. Let's assume the plant and equipment are valued at $200,000, and the capital works are valued at $800,000. Based on the effective life of the assets and using a diminishing value method, the owner can claim approximately $20,000 in plant and equipment depreciation and $10,000 in capital works depreciation in the first year. At a 30% corporate tax rate, this results in a $9,000 tax saving for the first year.
Professional Insight
In our experience, one thing business owners often overlook is the potential to maximise deductions through a detailed depreciation schedule. We frequently see owners underestimating the value of their assets because they rely solely on purchase invoices, missing out on potential deductions. Additionally, many are unaware that renovations and improvements can also be depreciated, which can significantly enhance tax benefits. Engaging a qualified Quantity Surveyor is crucial as they can identify and value all depreciable assets accurately.
When Does the Answer Change?
- Property Purchased Pre-1985: If the commercial property was built before 1985, capital works depreciation under Division 43 might not be claimable, though plant and equipment still can be.
- Mixed-Use Properties: For properties partially used for residential purposes, the depreciation calculations may differ, requiring separate assessments for each portion.
- Post-9 May 2017 Changes: The changes primarily affected residential properties, but it's essential to ensure all claims are compliant with current legislation.
- Property Held in an SMSF: If the property is held within a Self-Managed Super Fund, different rules may apply, affecting the depreciation claims.
When Should You Seek Professional Advice?
Professional advice is crucial when dealing with depreciation to ensure all claims are accurate and compliant with the legislation. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, while an accountant can integrate these deductions into your tax strategy effectively. If the property has undergone renovations, or if it's a mixed-use property, professional guidance becomes even more critical.