Claiming depreciation on a display home can be a strategic way for developers to reduce their taxable income. Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment assets such as air conditioning systems and appliances. Meanwhile, Division 43 allows for deductions on capital works, including the building structure itself.
The most common misconception is that display homes, because they are not used as traditional residential properties, do not qualify for depreciation claims. However, as these properties are part of the developer's business assets, they are indeed eligible. The key is understanding that depreciation is not just a tool for reducing tax on income properties but also applies to business assets, such as display homes used to generate future sales.
To see how this plays out, consider a display home in a new development in Melbourne valued at $800,000. Let's assume the plant and equipment are valued at $100,000 and the capital works at $500,000. In the first year, you might claim approximately $10,000 in Division 40 deductions and $12,500 in Division 43 deductions. At a 30% corporate tax rate, this reduces your tax liability by $6,750.
In our experience reviewing thousands of properties across Australia, developers often overlook the full scope of depreciable assets in display homes. Many fail to itemise all eligible plant and equipment, resulting in missed deductions. It's also common for developers to misunderstand the effective life of assets, which can lead to incorrect depreciation rates. Another frequent oversight is not updating depreciation schedules when assets are replaced or upgraded, which can skew financial statements.
The answer can differ depending on your situation. If the display home transitions to a residential property post-sale, the depreciation strategy will need adjusting. For properties built before 1987, additional considerations apply under Division 43. SMSF ownership may also affect depreciation claims, as certain assets might be treated differently. Additionally, if the property is used only part-year as a display home before being sold, prorating the depreciation claim is necessary.
While understanding the basics of depreciation is crucial, the specifics can vary widely based on individual circumstances. A Chartered Quantity Surveyor can ensure you are claiming the maximum eligible deductions, while an accountant can help integrate these into your broader tax strategy.