When dealing with a mixed-use property, such as a building that houses both residential apartments and commercial retail spaces, understanding how to apply depreciation is key to optimizing your tax outcomes. Mixed-use properties present unique challenges because they require apportioning deductions between different uses, each with its own tax implications.
Under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), plant and equipment assets, like air conditioning units or office furniture, can be depreciated. Meanwhile, Division 43 covers capital works deductions, which relate to the building structure itself, such as walls and roofing. For mixed-use properties, these deductions must be carefully apportioned based on the usage percentage of each type of space.
A common misconception is that depreciation applies uniformly across the entire property. However, the different tax treatments for residential and commercial areas mean that accurate allocation is essential. Residential properties are subject to restrictions—especially post-2017 changes—on claiming depreciation on second-hand plant and equipment, while commercial properties do not face such restrictions.
To see how this plays out, consider a 2015-built mixed-use property in Melbourne, valued at $1.2 million. Suppose it comprises 60% residential apartments and 40% commercial offices. The total depreciation for plant and equipment might be $50,000 annually. For the residential portion, given the 2017 changes, only new plant and equipment purchased after acquisition can be depreciated. If the commercial portion includes assets like office fit-outs, these can be fully depreciated. Assuming a 37% marginal tax rate, the residential depreciation might reduce your tax bill by $11,100, while the commercial portion could save you $7,400, totaling a $18,500 tax reduction in the first year.
In our experience reviewing thousands of properties across Australia, we often find that investors fail to appropriately apportion depreciation between residential and commercial spaces, leading to either missed deductions or compliance issues. Another frequent oversight is not updating asset registers when converting spaces from one use to another, which can affect depreciation eligibility. Additionally, many investors overlook the potential for higher depreciation rates on commercial assets compared to residential ones.
The answer can differ depending on your situation. For instance, properties acquired before 9 May 2017 may be grandfathered under previous rules, allowing more generous depreciation claims. Additionally, properties used partially for personal purposes may require further apportionment. If you own the property through an SMSF, there are specific compliance requirements that could impact your depreciation strategy. Furthermore, the depreciation rules for short-term rentals differ from those for long-term leases, especially in mixed-use scenarios where part of the property might be listed on platforms like Airbnb.
Given the complexity of these rules, it is wise to consult with both a Chartered Quantity Surveyor and an accountant. Together, they can ensure your depreciation claims are maximized while remaining compliant with ATO regulations. A QS can provide a detailed report that accurately apportions costs, while an accountant can integrate this into your broader tax strategy.