When you invest in a franchise, fitting out your premises is often a significant expense. Fortunately, Australian tax law allows you to claim depreciation on these costs, potentially reducing your taxable income and improving your cash flow.
Under Division 40 of ITAA 1997, you can depreciate plant and equipment assets used in your franchise fit-out, such as ovens, refrigerators, and air conditioning units. These assets have specific effective lives determined by the ATO, which dictate the rate at which you can claim depreciation. For example, commercial ovens might have an effective life of 10 years, while air conditioning units might range from 10 to 15 years.
Division 43 of ITAA 1997 allows you to claim capital works deductions for structural improvements and alterations, including walls, ceilings, and plumbing. The general rate for these deductions is 2.5% per annum over 40 years. A common misconception is that all fit-out costs can be immediately deducted. However, the reality is that they must be depreciated over time according to the asset's effective life or the capital works deduction rate.
To see how this plays out, consider a practical example. Imagine you own a café franchise in Melbourne. You spent $150,000 on the fit-out, with $50,000 allocated to plant and equipment and $100,000 to capital works. In the first year, you can claim depreciation on the plant and equipment under Division 40, potentially saving $5,000 in tax if your marginal tax rate is 30%. For the capital works, you claim $2,500 in deductions under Division 43.
In our experience reviewing thousands of properties across Australia, we often see business owners underestimating the value of their fit-out for depreciation purposes, potentially missing out on significant tax savings. Many also overlook the need to update their depreciation schedule regularly, especially after renovations or upgrades. It's crucial to maintain accurate records of all fit-out costs and to engage a qualified Quantity Surveyor to ensure you're claiming the maximum deductions legally available.
The answer can differ depending on your situation. If your franchise fit-out was completed before 1987, you may not be eligible for capital works deductions under Division 43, although plant and equipment can still be depreciated. Additionally, if you're leasing the premises, the ownership of certain assets may affect your claim. For instance, if the landlord owns the air conditioning system, you cannot claim depreciation on it.
When dealing with depreciation claims, it's wise to seek professional advice. A Chartered Quantity Surveyor can identify all depreciable assets and ensure your schedule is compliant with current legislation. Coupling this expertise with an accountant's tax strategy can optimise your deductions and enhance your business's financial health.