Depreciating assets in a build-to-rent commercial development can significantly enhance your tax position by reducing your taxable income. Under Division 40 of the ITAA 1997, you can claim depreciation on plant and equipment, such as machinery and furniture, while Division 43 allows for deductions on capital works, including buildings and structural improvements.
A common misconception is that depreciation only applies to residential properties or traditional commercial leases. However, the build-to-rent model, which involves constructing and renting out commercial spaces, fully qualifies for depreciation claims. The key is ensuring that all claims align with the ATO's guidelines, particularly regarding the effective life of assets and the specific nature of improvements.
To see how this plays out, consider a build-to-rent commercial development in Melbourne valued at $5 million. The building itself is eligible for capital works deductions under Division 43. If the construction cost of the building is $3 million, you might be able to claim approximately $75,000 annually (assuming a 2.5% deduction rate). Additionally, plant and equipment worth $500,000 could offer a further $50,000 in annual deductions, depending on the effective life of the assets. At a 30% corporate tax rate, these deductions could reduce your tax liability by $37,500 annually.
In our experience reviewing thousands of properties across Australia, developers often miss out on substantial deductions due to inadequate documentation of construction costs and asset values. Another frequent oversight is failing to update depreciation schedules as assets are replaced or enhanced. Furthermore, many developers don't fully utilise the opportunities for accelerated depreciation on certain assets under temporary tax incentives.
The answer can differ depending on your situation. For instance, if the property was acquired after 7:30pm AEST on 9 May 2017, the rules around claiming Division 40 depreciation on second-hand plant and equipment might affect your deductions. Properties constructed before 1987 generally don't qualify for capital works deductions unless substantial renovations have occurred. Ownership structure, such as through a self-managed superannuation fund (SMSF), can also impact the type and amount of depreciation you can claim.
When the stakes involve significant tax savings, professional advice is invaluable. A Chartered Quantity Surveyor can accurately assess the depreciable value of your property, while an accountant ensures compliance with the latest tax laws. Together, they help maximise your returns and avoid costly mistakes.