Claiming depreciation on a leased commercial property as a tenant is not only possible but can also be a significant tax-saving strategy. As a tenant, you are entitled to claim depreciation on the plant and equipment (Division 40) you install, as well as any fit-out you undertake. However, the building structure itself (Division 43) remains the responsibility of the property owner, and you cannot claim this.
Under Division 40 of ITAA 1997, you can claim depreciation for items such as air conditioning, carpet, and office furniture that you have installed in the leased premises. It's important to note that these items must be owned by you and used in your business operations. This is where many tenants make a mistake, assuming they can claim on all fixtures regardless of ownership.
To see how this plays out, consider a scenario where you lease a 200 square metre office space in Melbourne. You decide to fit out the office with new air conditioning units, office desks, and lighting. The total cost of these installations comes to $50,000. Given the effective life of these assets, you can claim a significant depreciation deduction in the first year. Assuming a 37% marginal tax rate, this could reduce your tax liability by approximately $7,400 in the first year alone.
In our experience reviewing thousands of properties across Australia, many tenants overlook the importance of maintaining detailed records of their fit-out costs. This oversight can lead to missed depreciation claims. Additionally, tenants often forget to reassess their depreciation schedule when they make further improvements or changes to the leased space.
The answer can differ depending on your situation. If you lease a commercial property and have undertaken significant fit-out works before 9 May 2017, you may be able to claim on certain items under previous rules. For tenants leasing properties in heritage-listed buildings, certain restrictions may apply to the types of improvements you can claim. Furthermore, if you are leasing as part of a joint venture or through an SMSF, specific rules around ownership and use may impact your claim.
Given the complexities involved in claiming depreciation on leased commercial properties, obtaining professional advice is crucial. A Chartered Quantity Surveyor can provide a detailed depreciation schedule tailored to your specific fit-out and assets, ensuring you maximise your tax deductions. Your accountant can then integrate this schedule into your overall tax strategy, optimising your financial outcomes.