Depreciation is a crucial financial tool for shopping centre owners, enabling them to claim deductions for the decline in value of their assets. Under Division 40 of ITAA 1997, owners can claim depreciation on plant and equipment, while Division 43 allows for deductions on capital works. These provisions help offset income and can lead to significant tax savings.
For shopping centre owners, understanding these divisions is key. Division 40 covers assets like escalators, air conditioning systems, and security systems, while Division 43 includes structural elements like walls, floors, and ceilings. The most common misconception is that all assets are depreciated at the same rate, which is not the case. Each asset has a specific effective life that determines its depreciation rate, as outlined by the ATO.
Take a practical example of a shopping centre in Melbourne purchased for $10 million. The plant and equipment, valued at $2 million, could be depreciated over their effective life, reducing taxable income significantly. For instance, if the effective life of assets averages 10 years, the annual deduction might be $200,000. Capital works valued at $5 million could be depreciated at 2.5% per annum, adding another $125,000 in deductions. At a 30% corporate tax rate, this could reduce the tax bill by $97,500 annually.
In our experience reviewing thousands of properties across Australia, shopping centre owners often overlook the complexity of plant and equipment schedules. Many fail to update their depreciation schedules after refurbishments, missing out on additional deductions. Also, incorrect classifications between Division 40 and Division 43 can lead to audit issues. Another common oversight is not considering the impact of tenant improvements, which can be depreciated if the owner incurs the cost.
The answer can differ depending on your situation. For example, if you purchased a shopping centre after 7:30pm AEST on 9 May 2017, the rules for claiming Division 40 depreciation on pre-existing assets are stricter. Additionally, for properties built before 1987, capital works deductions under Division 43 may not apply unless renovations have been made. Ownership through an SMSF or a corporate structure can also affect the depreciation strategy.
When dealing with depreciation, professional advice is invaluable. A Chartered Quantity Surveyor can provide a detailed depreciation schedule that maximises your claim, and an accountant can integrate this into your overall tax strategy. Together, they ensure compliance and optimise your tax position.
To maximise your depreciation benefits: