When dealing with commercial property depreciation, the ATO offers opportunities to claim deductions on both plant and equipment (Division 40) and capital works (Division 43). This is crucial for accountants advising clients on maximising their tax benefits. Unlike residential properties, commercial properties allow depreciation claims on both new and second-hand assets, making this a valuable tool for investors looking to reduce taxable income.
Under Division 40 of ITAA 1997, plant and equipment are considered assets that can be depreciated over their effective life. This includes items like carpets, air conditioning units, and office equipment. The effective life of these assets is determined by the ATO and directly impacts the depreciation rate.
Division 43 covers capital works deductions for the structure of the building and any permanent fixtures. This includes the building itself, plumbing, and wiring. The rate of deduction is typically spread over 40 years, at a rate of 2.5% per annum, but it's essential to confirm the specific rate applicable to your property.
To see how this plays out, consider a 2015-built commercial office in Sydney, purchased for $1.2 million. The plant and equipment within the property, valued at $200,000, can be depreciated over their effective lives as per ATO guidelines. Assuming an average effective life of 10 years for these assets, you can claim a depreciation deduction of $20,000 annually. For capital works, assuming a remaining value of $800,000, you can claim $20,000 annually. At a 30% corporate tax rate, these deductions can reduce your tax liability by approximately $12,000 per year.
In our experience reviewing thousands of properties across Australia, many investors overlook the potential to claim depreciation on second-hand plant and equipment in commercial properties. Another common oversight is failing to update the depreciation schedule after renovations, which can lead to missed deductions. Additionally, some investors mistakenly assume that depreciation rules for residential properties apply to commercial properties, leading to under-claimed benefits.
The answer can differ depending on your situation. For instance, properties purchased before 1985 are not eligible for capital works deductions unless substantial renovations have occurred. Self-managed super funds (SMSFs) holding commercial properties must adhere to specific compliance rules, and the treatment of depreciation can vary. Additionally, joint ownership structures can affect how depreciation is claimed, as the deductions must be apportioned according to ownership percentage.
While the ATO provides general guidelines, the specifics of your situation can significantly impact depreciation claims. Engaging a Chartered Quantity Surveyor ensures that your depreciation schedule is maximised and compliant with current legislation. Working with an accountant ensures these claims are correctly applied in tax filings, optimising your financial outcomes.