Can I use a company to claim depreciation and then pay dividends from the tax savings?

Dividends from a company are taxable in the hands of shareholders, potentially with franking credits attached. The overall tax effect depends on the shareholders' marginal rates and whether they can use the franking credits.

Does it matter if the company is a holding company or a trading company?

Not for depreciation purposes. The depreciation rules apply to any company that owns property used for income-producing purposes, regardless of the company's other activities.

Can a company access the instant asset write-off for plant and equipment?

The instant asset write-off (for small business entities) can apply to certain depreciating assets. Eligibility depends on the company's aggregated turnover threshold. Speak to your accountant about whether this applies to your situation.

Can I claim depreciation if property is owned by a company?

Property depreciation in a company

A company that owns property — whether residential investment property or commercial property — can claim the same Division 43 capital works and Division 40 plant and equipment depreciation as an individual investor. The mechanics are the same; the tax rate is different.

How it works

Division 43 — Capital works: The company claims 2.5% per year of the original construction cost of the building structure. This reduces the company's taxable income.

Division 40 — Plant and equipment: The company depreciates fixtures and fittings using the ATO's effective life rulings. Companies can use either the diminishing value or prime cost method.

Residential vs commercial property

Residential property: The 2017 restriction on second-hand plant and equipment applies to companies owning residential investment property in the same way as individuals. A company buying a second-hand residential property after 9 May 2017 cannot claim Division 40 on pre-existing assets.

Commercial property: The second-hand restriction does not apply to commercial property. A company buying a commercial property with existing fit-out can claim Division 40 depreciation on the assets.

The company tax rate

Deductions in a company save tax at the company tax rate:

Base rate entity (small company): 25%
General corporate rate: 30%

This is lower than most individual marginal rates (up to 47%), which means the depreciation deduction is worth less per dollar in a company than for an individual on the top tax rate.

No CGT discount

Companies do not qualify for the 50% CGT discount on capital gains when they eventually sell the property. This is a significant disadvantage compared to individual or trust ownership for long-term investment properties.

Depreciation and cost base

For companies, Division 43 deductions reduce the property's cost base for CGT purposes, the same as for individuals. Because companies pay CGT at the full corporate rate (not discounted), the interaction between depreciation and CGT is different from personal ownership.

Summary

Companies can claim depreciation on property they own. However, the tax savings from depreciation are lower (at the corporate rate) and the CGT treatment on sale is less favourable (no discount) than personal or trust ownership structures.

Written by Koste Team · Koste Chartered Quantity Surveyors · AIQS Member · RICS Member · TPB Registered · 1300 669 400 · info@koste.ai