Office building owners in Australia can leverage depreciation to enhance their tax efficiency and improve cash flow. Depreciation allows owners to claim deductions for the decline in value of the building structure (capital works) and its plant and equipment (depreciating assets).
Under Division 40 of ITAA 1997, owners can claim depreciation on plant and equipment. These include items like carpets, air conditioning units, and office furniture. The effective life of these assets determines the rate at which depreciation is claimed. For instance, carpets generally have an effective life of around 8 years.
Division 43, on the other hand, pertains to capital works deductions. This includes the structural elements of the building like walls, floors, and ceilings. Generally, office buildings constructed after 16 September 1987 are eligible for a capital works deduction at a standard rate, often around 2.5% per annum.
A common misconception is that depreciation only benefits residential property owners; however, commercial property owners can often claim more substantial deductions due to typically higher asset values and construction costs.
Take a practical example of a 2015-built office building in Melbourne, purchased for $1.2 million. Assume the building structure is valued at $900,000 and plant and equipment at $300,000. Under Division 43, you could claim approximately $22,500 annually for capital works. For plant and equipment, if the average depreciation rate is 15%, you could claim an additional $45,000 in the first year. At a 30% company tax rate, this results in a tax saving of $20,250 in year one.
In our experience reviewing thousands of properties across Australia, office building owners often overlook the importance of a detailed depreciation schedule. Many miss claiming eligible items simply because they were unaware of their eligibility. Engaging a Chartered Quantity Surveyor ensures all claimable items are identified, maximising your deduction. Furthermore, some owners mistakenly believe older buildings do not qualify for any deductions, missing potential savings on eligible renovations or improvements.
The answer can differ depending on your situation. For instance, if your office building was acquired after 9 May 2017, specific second-hand plant and equipment rules apply, potentially limiting your claims. Pre-1987 buildings might not qualify for capital works deductions unless significant renovations were undertaken. Similarly, if the property is held within a self-managed superannuation fund, different tax implications may arise.
Engaging a Chartered Quantity Surveyor and an accountant is crucial to navigating the intricacies of depreciation. A QS provides an accurate depreciation schedule, while your accountant ensures these claims are correctly applied to your tax return, aligning with your broader financial strategy.