Depreciation for purpose-built student accommodation offers significant opportunities for investors to maximise tax deductions. These properties, often classified as commercial, benefit from both Division 40 allowances for plant and equipment and Division 43 deductions for capital works. Understanding these divisions is crucial to optimising your tax position.
Under Division 40 of the ITAA 1997, plant and equipment assets—such as furniture, fittings, and appliances—can be depreciated over their effective lives. This includes items like air conditioning units and common area equipment, which are essential to student living facilities. The most common misconception is that these deductions are similar to residential properties, but commercial classifications can result in higher deduction rates.
Division 43 pertains to the structural elements of the building, such as walls, roofs, and fixed items like sinks and basins. Purpose-built student accommodation, often constructed to meet specific standards and requirements, can attract substantial deductions under this division, especially if constructed post-1987.
To see how this plays out, consider a 2015-built student accommodation complex in Carlton, Melbourne, purchased for $1.5 million. Suppose the plant and equipment are valued at $300,000. Under Division 40, these assets might depreciate over 5 to 15 years. In the first year, assuming a 20% deduction rate for simplicity, you'd claim $60,000. Under Division 43, if the capital works are valued at $1 million, you could claim up to 2.5% per annum, amounting to $25,000. At a 37% marginal tax rate, this reduces your tax bill by $31,450 in the first year.
In our experience reviewing thousands of properties across Australia, investors often overlook the full potential of these deductions. Many miss out on claiming all eligible plant and equipment items, or they incorrectly classify them, leading to reduced claims. Another common error is failing to update depreciation schedules after refurbishments or upgrades, which can enhance deductions significantly.
The answer can differ depending on your situation. For properties acquired post-9 May 2017, second-hand plant and equipment items have different rules—new acquisitions can't claim depreciation on previously used assets. For older buildings, those constructed before 1987, Division 43 deductions may not apply unless significant renovations have occurred. If owned by an SMSF, different tax implications might arise, and joint ownership can affect how deductions are split.
Given the complexities, engaging a Chartered Quantity Surveyor alongside your accountant is advisable. These professionals can ensure every possible deduction is captured, tailored to your specific circumstances and financial goals.