Understanding whether you can claim depreciation during the construction phase is critical for developers planning the financial aspects of a project. The short answer is no, you cannot claim depreciation during construction. Depreciation applies to assets that are in use, which typically means post-construction when the property is either rented out or available for rent.
Depreciation and the Construction Phase
Under Division 40 and Division 43 of the Income Tax Assessment Act 1997, depreciation deductions are available once the asset is installed and ready for use in producing income. This means that during the construction phase, assets are not yet in a condition to generate income, and therefore, no depreciation can be claimed. A common misconception is that expenses incurred during construction, such as purchasing fixtures and fittings, can be depreciated immediately. However, these deductions only commence once the property is completed and available for rent or business use.
How This Works in Practice
Consider a developer building a 10-unit apartment complex in Sydney, with construction beginning in January 2023 and completion scheduled for December 2023. The total construction cost is $5 million, with plant and equipment assets valued at $500,000. While developers incur costs throughout the year, they cannot claim any depreciation until the complex is completed and available for lease. Assuming the complex is available for rent from January 2024, depreciation on plant and equipment can then be claimed from this date, potentially saving $18,500 in tax for the first year, assuming a 37% tax rate.
Professional Insight
In our experience, developers often overlook the importance of timing when it comes to depreciation. One thing we frequently see is developers attempting to claim depreciation too early, resulting in ATO audits and penalties. Another common issue is not keeping detailed records of all plant and equipment purchases during construction, which complicates claims later. What most developers don't realise is the benefit of a thorough depreciation schedule prepared by a Quantity Surveyor, which maximises deductions once the property is income-producing. Engaging a professional early can streamline this process.
When Does the Answer Change?
The general rule is consistent, but there are nuances:
- Mixed-use developments: If part of the property is available for use while construction continues elsewhere, depreciation may apply to the completed sections.
- Partial year usage: If a property becomes available partway through a financial year, depreciation is calculated proportionally.
- Commercial vs Residential: Commercial properties may have different deductions depending on their use and the assets involved.
- SMSFs and Trusts: Different ownership structures can affect when and how depreciation is claimed.
When Should You Seek Professional Advice?
Consulting with a Chartered Quantity Surveyor and an accountant is crucial when dealing with complex depreciation rules. They can provide tailored advice based on the specific details of your project, ensuring compliance and maximising deductions. Issues such as mixed-use developments, complex ownership structures, and partial-year usage can significantly affect your tax outcomes.