When a commercial tenant makes improvements to their leased property, they often wonder if they can claim depreciation on these enhancements. The good news is that commercial tenants can claim depreciation on improvements, provided they meet certain criteria. Understanding how this works can lead to significant tax savings.
Under Division 40 of ITAA 1997, tenants can claim depreciation on plant and equipment they install, such as air conditioning units, carpets, or office furniture. These assets have a defined effective life, which determines the depreciation rate. Meanwhile, Division 43 allows tenants to claim capital works deductions on structural improvements they make, such as adding partitions or refurbishing bathrooms. This deduction is generally calculated at 2.5% per annum over 40 years.
A common misconception is that only landlords can claim these deductions, but tenants who incur the costs of improvements can also benefit. It's essential to distinguish between plant and equipment and capital works to ensure accurate claims.
To see how this plays out, consider a scenario where a tenant in a Melbourne office building installs a new HVAC system worth $50,000 and partitions costing $30,000. The HVAC system, under Division 40, could be depreciated over 10–15 years, while the partitions, under Division 43, could be claimed at 2.5% per annum. Assuming a 37% marginal tax rate, the tenant could potentially reduce their tax bill by $1,850 in the first year from the HVAC system alone.
In our experience reviewing thousands of properties across Australia, many tenants overlook the potential for depreciation claims on improvements. Often, they mistakenly believe these are only available to landlords. Additionally, tenants frequently misclassify improvements, leading to incorrect claims. Engaging a Quantity Surveyor can help identify all eligible assets and ensure compliance with ATO guidelines.
The answer can differ depending on your situation. If the lease agreement specifies that improvements revert to the landlord at the end of the lease, the ability to claim may be impacted. Improvements made prior to 1987 generally do not qualify for capital works deductions. Additionally, the nature of the business and the specific lease terms can influence the eligibility and extent of claims.
Given the complexities involved, it's advisable to seek professional advice. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, ensuring all improvements are correctly classified and claimed. Working alongside your accountant will ensure you maximise tax benefits while remaining compliant.