Developers often face complex tax situations, especially when it comes to depreciation claims on properties built to sell. Understanding what you can and cannot claim is essential to optimise your tax position and avoid costly mistakes.
Depreciation Claims for Developers
When you build a property with the intention to sell, you can claim depreciation on both plant and equipment (Division 40) and capital works (Division 43) during the construction phase. Division 40 covers assets like appliances and fixtures, while Division 43 relates to structural improvements. However, depreciation claims are only applicable while you hold the property as part of your inventory. Once sold, the ability to claim depreciation ceases, as the property is no longer generating income for you.
A common misconception is that developers can continue to claim depreciation after the sale, but this is not the case unless the property is held as an investment. The construction costs can be included in the cost base for capital gains tax calculations, which is beneficial when calculating potential CGT liabilities.
How This Works in Practice
Consider a developer constructing a 10-unit apartment complex in Melbourne. The total construction cost is $3 million, with plant and equipment valued at $500,000. During the construction phase, the developer can claim depreciation on these costs. If the project spans over 2 years, the developer might claim approximately $50,000 in depreciation annually, reducing taxable income. Upon selling the units, the depreciation claims stop, but the construction costs contribute to the cost base for CGT purposes.
Professional Insight
In our experience, developers often overlook the importance of detailed record-keeping during the construction phase. This documentation is crucial for substantiating depreciation claims and ensuring accurate cost base calculations for CGT. One thing we frequently see is developers missing out on claiming all eligible plant and equipment items, which can add up to significant tax savings. Also, many developers are unaware that they can claim depreciation on partially completed projects if they are held as trading stock. What most developers don't realise is the potential impact of miscalculating depreciation on their overall tax position, leading to either overpayment or issues during audits.
When Does the Answer Change?
When Should You Seek Professional Advice?
Depreciation claims depend heavily on individual circumstances, including the type of property, its use, and ownership structure. Consulting with a Chartered Quantity Surveyor is essential to navigate the complexities of depreciation, especially for large-scale developments. An accountant can also assist in integrating these claims into your broader tax strategy, ensuring compliance and optimisation of tax benefits.