Handling the tax treatment of a mixed-use property, which combines both residential and commercial elements, requires careful consideration of several factors. The key is to appropriately allocate income and expenses, including depreciation and GST, between the different parts of the property. Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment, while Division 43 allows for capital works deductions. The challenge lies in accurately apportioning these deductions based on the property's use.
A common misconception is that the same rules apply uniformly across the entire property, but in reality, each portion must be treated according to its specific use. This means that expenses, such as interest on a loan, must be divided in line with the income-generating capability of each section. Additionally, GST may apply to the commercial portion, affecting the overall tax treatment.
To see how this plays out, consider a mixed-use property in Sydney valued at $1.2 million, consisting of a ground-floor retail space and an upstairs apartment. Suppose the retail space generates $60,000 annually, while the apartment earns $30,000 in rent. You would apportion the building's depreciation and any applicable expenses based on the income ratio. If the total depreciation claimable under Division 43 is $10,000, then $6,667 would be attributed to the commercial space and $3,333 to the residential.
In our experience reviewing thousands of properties across Australia, we often find that investors miss opportunities by not claiming full deductions available under each division. Another common issue is the incorrect application of GST, particularly when the commercial portion is leased. Investors also frequently overlook the impact on CGT; the commercial portion may not be eligible for the main residence exemption, potentially leading to a higher tax bill upon sale.
The answer can differ depending on your situation. If your property was acquired post-9 May 2017, the ability to claim Division 40 deductions on second-hand plant and equipment will differ based on whether the property is residential or commercial. For pre-1987 buildings, significant improvements could make them eligible for Division 43 deductions. If an SMSF owns the property, different rules may apply regarding income and expenses.
Given the complexities involved in apportioning expenses and understanding tax implications across different property uses, it's advisable to engage both a Chartered Quantity Surveyor and an accountant. They can ensure that all aspects of your property's tax treatment are optimised and compliant with ATO guidelines.