Leasing a commercial building offers business owners the opportunity to claim depreciation deductions, which can substantially reduce taxable income. This is possible under Division 40 for plant and equipment, and Division 43 for building structure and capital works, of the Income Tax Assessment Act 1997. Understanding these regulations and applying them correctly is key to maximising your tax benefits.
Claiming Depreciation on a Leased Commercial Building
When you lease a commercial building, you are entitled to claim depreciation on both the plant and equipment and the capital works. Division 40 of the ITAA 1997 covers depreciating assets such as fixtures and fittings, while Division 43 covers the structural elements of the building. Lessees can claim depreciation on assets they install as well as existing assets, provided they have the right to use and benefit from these assets during the lease.
A common misconception is that only owners can claim depreciation. In fact, lessees have the right to claim depreciation on assets they have installed and, under certain conditions, on existing assets they use. However, the ability to claim on existing assets depends on the lease agreement's terms and whether the lessee has made any capital contributions.
How This Works in Practice
Consider a business owner leasing a 500 sqm office space in a Melbourne CBD building, valued at $1 million. The building was constructed in 2015. The lessee installs new air conditioning units, worth $50,000, and fits out the office with partitions and workstations costing $100,000.
Under Division 40, the lessee can claim depreciation on the air conditioning units and office fit-out. Assuming an effective life of 10 years for the air conditioning and 5 years for the fit-out, the first-year depreciation claim could be approximately $5,000 for the air conditioning and $20,000 for the fit-out. Additionally, under Division 43, the lessee can claim capital works deductions on the building structure at 2.5% per year, equating to $25,000 annually.
At a 30% corporate tax rate, this results in a tax saving of $15,000 for the first year.
Professional Insight
In our experience, lessees often overlook the significant tax benefits of claiming depreciation on leased commercial buildings. One thing we frequently see is lessees not keeping detailed records of the assets they install, which complicates depreciation claims. Another common issue is misunderstanding the lease agreement terms regarding asset ownership and responsibility, which can lead to missed claims. What most investors don't realise is that a Chartered Quantity Surveyor can help identify all claimable assets, ensuring maximum deductions are achieved. Lastly, businesses often forget to update their depreciation schedules when they renovate or upgrade, missing out on potential savings.
When Does the Answer Change?
- Lease Agreement Terms: If the lease specifies that certain assets remain the property of the lessor, you may not be able to claim depreciation on those assets.
- Capital Contributions: If the lessor has contributed to the cost of building improvements, you may need to share the depreciation claim proportionally.
- Pre-1987 Buildings: For buildings constructed before 1987, capital works deductions under Division 43 may not be available.
- Short-term Leases: For leases shorter than a year, the ability to claim can vary depending on the specific lease terms and business use.
When Should You Seek Professional Advice?
Depreciation claims depend on specific lease terms, asset ownership, and contributions made by the lessee or lessor. A Chartered Quantity Surveyor can accurately assess and prepare a depreciation schedule tailored to your lease, ensuring compliance and maximising deductions. Additionally, consulting with your accountant is essential to integrate these deductions effectively into your tax strategy.