Leasing your business premises to yourself can be a strategic move, but it requires careful consideration of tax implications and compliance with Australian tax laws. This arrangement is permissible, but it must be structured correctly to ensure you can claim depreciation effectively.
How Leasing to Yourself Affects Depreciation
When you lease a business premises to yourself, you must ensure that the lease agreement is at market rates and the property is used predominantly for business purposes. Under Division 40 of the Income Tax Assessment Act 1997, you can claim depreciation on plant and equipment, such as office furniture and machinery. Division 43 covers capital works deductions on the building structure itself.
A common misconception is that leasing to oneself is a loophole or workaround. However, the ATO views this as a legitimate arrangement as long as it reflects a genuine business transaction. The lease must be at arm's length, meaning the terms should be similar to what would be agreed upon with an unrelated third party.
How This Works in Practice
Consider a scenario where you own a commercial property at $1.5 million, which you lease to your business at $50,000 annually. The property includes $200,000 worth of depreciating assets. Under Division 40, you can claim depreciation on these assets based on their effective life. For instance, if eligible assets depreciate at $10,000 annually, this could reduce your taxable income, saving you approximately $3,700 in tax at a 37% marginal rate.
Professional Insight
In our experience, the key to successfully leasing your premises to yourself lies in maintaining market-comparable lease terms. One thing we frequently see is business owners not documenting the lease agreement properly, which can raise red flags with the ATO. Another common oversight is failing to update the effective life of assets, which can result in incorrect depreciation claims. What most investors don't realise is the importance of a comprehensive tax depreciation schedule prepared by a Chartered Quantity Surveyor to maximise deductions legally.
When Does the Answer Change?
Several scenarios can alter the general answer:
- Property Use Change: If the property use changes from business to personal, depreciation claims may not be allowable.
- Pre-1985 Buildings: Properties constructed before 1985 may have limited capital works deductions.
- Non-Arm's Length Transactions: If the lease terms are not at market value, the ATO may disallow deductions.
- Mixed-Use Properties: If part of the property is used for personal purposes, only the business portion is deductible.
When Should You Seek Professional Advice?
You should consult a Chartered Quantity Surveyor and an accountant when structuring a lease to ensure compliance and optimise tax benefits. The complexity of tax laws means that a general article cannot substitute for professional advice tailored to your specific circumstances.