When it comes to mixed-use buildings, understanding how depreciation applies can significantly impact your tax outcomes. Mixed-use properties, which combine residential and commercial spaces, require careful consideration under Australian tax law to ensure you're maximising your depreciation claims.
Under Division 40 of the ITAA 1997, plant and equipment depreciation is applicable to all qualifying assets within a mixed-use building. These assets include items like air conditioning units, lighting, and other fixtures. Meanwhile, Division 43 covers capital works depreciation, which pertains to the building's structural elements, such as walls and roofs. It's essential to note that the 2017 budget changes restrict claiming Division 40 depreciation on previously used residential plant and equipment for properties acquired after 9 May 2017. However, this does not affect commercial components.
A common misconception is that depreciation can be uniformly applied across the property. In reality, you must apportion the depreciation between the commercial and residential parts of the building. This ensures compliance with tax laws and optimises your claim.
Take a practical example of a three-story mixed-use building in Richmond, Melbourne, purchased for $1.2 million. The ground floor is a café, and the upper floors consist of residential apartments. The building is eligible for both Division 40 and Division 43 deductions. Suppose the plant and equipment for the café are valued at $150,000. You can claim these under Division 40. Meanwhile, the building structure, valued at $800,000, allows a Division 43 claim. At a 37% marginal tax rate, this can result in a tax saving of approximately $5,550 in the first year, assuming a 2.5% capital works rate.
In our experience reviewing thousands of properties across Australia, investors often overlook the need to separate depreciation calculations for mixed-use properties. This oversight can lead to inaccurate claims and potential ATO audits. Additionally, many fail to update depreciation schedules when the use of the property changes, such as converting a residential area into a commercial space.
The answer can differ depending on your situation. For properties acquired after 9 May 2017, the rules for claiming Division 40 on second-hand residential assets are more restrictive. Furthermore, if a property is owned by a Self-Managed Super Fund (SMSF), different tax treatments may apply, impacting depreciation claims. Joint ownership and partial-year ownership also require specific apportionments.
Given the complexities involved, obtaining professional advice is crucial. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, ensuring compliance and maximising your deductions. Working alongside an accountant helps tailor the approach to your unique tax circumstances.