A core and shell building refers to a commercial property development that includes the basic structure, such as the walls, floors, roof, and essential services like elevators and HVAC systems, but excludes internal fit-outs specific to tenant needs. These structures are common in commercial real estate, where developers provide a blank canvas for tenants to customise according to their business requirements.
In terms of depreciation, these buildings are primarily considered under Division 43 of ITAA 1997, which covers capital works. This means the structural components of the building can generally be depreciated at a rate of 2.5% over 40 years, provided construction commenced after 15 September 1987. For plant and equipment items that may be included in the core and shell, such as HVAC systems, these fall under Division 40 and have different effective life spans depending on the asset type.
A common misconception is that all elements of a core and shell building can be depreciated at the same rate. However, only the structural components fall under the capital works deduction. Plant and equipment must be assessed separately, with their own depreciation schedules based on effective life and usage.
Take a practical example: Imagine a core and shell office building constructed in 2015 in Melbourne, purchased for $5 million. The building's structure, valued at $4 million, is eligible for capital works deductions at 2.5% per annum, equating to $100,000 annually. If the building includes an HVAC system valued at $300,000, under Division 40, it might depreciate over 15 years. At a 30% corporate tax rate, these deductions can result in a tax saving of approximately $30,000 in the first year for the structure alone.
In our experience reviewing thousands of properties across Australia, investors often overlook the importance of distinguishing between capital works and plant and equipment. Many fail to claim maximum deductions due to incorrect categorisation. Another frequent issue is the miscalculation of effective life for plant and equipment, leading to inaccurate depreciation schedules. Furthermore, some investors neglect to update depreciation schedules after tenant fit-outs, missing additional deductions.
The answer can differ depending on your situation. For example, if a building was constructed before 16 September 1987, different rules apply for capital works deductions. Additionally, properties held in a Self-Managed Super Fund (SMSF) may have specific compliance requirements. Joint ownership can also affect tax positions, as can the use of the building — whether it's fully leased or partially owner-occupied.
Given the complexity and significant financial implications, engaging a Chartered Quantity Surveyor alongside your accountant is vital. A QS can ensure all eligible deductions are identified and accurately reported, while your accountant can integrate these into your broader tax strategy.