Depreciation in build-to-rent developments is a critical factor for developers and investors aiming to maximise returns. It allows you to claim deductions for the decline in value of both plant and equipment (Division 40) and capital works (Division 43) under the ITAA 1997. Understanding these deductions can significantly impact your project's profitability.
Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment assets such as appliances, carpets, and air conditioning units. These assets have varying effective lives, which determine the depreciation rate. For example, air conditioning units typically have an effective life of 10-15 years. In contrast, Division 43 covers capital works deductions for the building structure and fixed items like walls and roofs, generally written off at 2.5% per annum for buildings constructed after 16 September 1987.
A common misconception is that all depreciation benefits can be claimed immediately. However, the 2017 budget changes restrict Division 40 deductions for second-hand residential properties acquired after 9 May 2017. Fortunately, new build-to-rent developments are exempt from this restriction, allowing full depreciation benefits to be realised.
To see how this plays out, consider a hypothetical build-to-rent project: a new 50-unit apartment complex in Melbourne, completed in 2023 with a construction cost of $15 million. Assuming the plant and equipment assets are valued at $1.5 million, and the capital works are valued at $13.5 million, the first-year depreciation claim could be approximately $375,000 for capital works and $150,000 for plant and equipment. At a 30% corporate tax rate, this results in a tax saving of $157,500 in the first year, significantly enhancing cash flow.
In our experience reviewing thousands of properties across Australia, we find that developers often underestimate the value of plant and equipment, missing out on potential deductions. Additionally, failing to obtain a detailed depreciation schedule from a qualified Quantity Surveyor can lead to inaccurate claims. Some developers also overlook the impact of renovations or upgrades on depreciation, which can significantly alter the deductible amounts.
The answer can differ depending on your situation. If your development includes mixed-use properties, such as retail on the lower floors and residential above, the depreciation rules may vary between the commercial and residential components. Additionally, if the project is owned by a self-managed superannuation fund (SMSF), different tax implications may arise. Developers with international investors should also be aware of how foreign ownership affects depreciation claims.
When considering depreciation strategies, it's crucial to engage both a Chartered Quantity Surveyor and an accountant. A QS will provide an accurate depreciation schedule tailored to your development, ensuring compliance with the ATO's guidelines and maximising your deductions. An accountant will help integrate these deductions into your broader tax strategy.