Owning a licensed premises like a pub can be a lucrative investment, but understanding how to claim depreciation effectively is key to maximising your tax benefits. Under Australian tax law, you can claim depreciation on both the structure of the building and the assets within it.
Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment, which includes items like kitchen appliances, furniture, and lighting fixtures. These assets are subject to wear and tear over time, and the ATO allows you to deduct their diminishing value from your taxable income.
Division 43, on the other hand, covers capital works deductions. This includes the building itself and any structural improvements. For pubs, this could involve the bar area, dining spaces, and restrooms. The key misconception is that only newly purchased items can be depreciated. However, as long as the assets are used in generating assessable income, they are eligible for depreciation.
To see how this plays out in practice, consider a pub in Melbourne purchased for $1.5 million. The building structure accounts for $1 million, and plant and equipment make up the remaining $500,000. Under Division 43, you could claim approximately 2.5% annually on the building structure, translating to a deduction of $25,000 per year. For the plant and equipment, assuming an average effective life of 10 years, you might claim $50,000 in the first year. At a 37% marginal tax rate, this could reduce your tax bill by $27,750 in the first year alone.
In our experience reviewing thousands of properties across Australia, we've noticed that many investors overlook older structures for potential renovations that could enhance depreciation claims. Additionally, failing to maintain accurate records of improvements can lead to missed deductions. Another common oversight is not updating the depreciation schedule following significant refurbishments.
The answer can differ depending on your situation. For instance, if your pub is part of a larger commercial complex, the depreciation calculations might involve shared facilities. Also, if you purchased the pub post-2017, second-hand plant and equipment rules could affect your claims. For pre-1987 buildings, substantial renovations might be needed to qualify for capital works deductions. If the pub is owned by an SMSF, different tax implications could apply.
Given the complexities involved, it's wise to engage both a Chartered Quantity Surveyor and an accountant. A QS will provide a detailed depreciation schedule, ensuring all eligible claims are captured, while your accountant can integrate these into your overall tax strategy.