Everything You Need to Know About Commercial Property Depreciation Eligibility
Did you know that the Australian Tax Office (ATO) allows you to claim depreciation deductions on commercial properties? It’s not only for residential property investors.
The difference, however, is that when you invest in commercial property there are substantial tax benefits for both the commercial property owners and tenants.
Here’s how it all works.
What Is Commercial Property?
If you’re investing in commercial investment property, it’s generally so that you can generate rent from tenants who wish to operate a business from it.
So, property investors who own commercial property will generate their income from renting the property to commercial tenants.
Examples include:
- warehouses;
- restaurants;
- offices;
- shopping centres or shop fronts; and
- medical practices.
What Is Commercial Property Depreciation?
Just like with residential buildings, as the commercial building gets older it depreciates. This means that its structure and the assets within the building are subject to general wear and tear – so the value decreases.
There are two types of commercial depreciation deductions:
- Division 43 – Capital Works Deductions
Division 43 capital works deductions refer to the depreciation of the structure of the building.
Generally, commercial property owners are eligible to claim depreciation on a commercial building if it was constructed after 20 July 1982.
- Division 40 – Plant and Equipment
The term “plant and equipment” (or Division 40) refers to the fixtures and fittings that are found within the building.
These are generally known as easily removable assets and span across light fittings and carpets to commercial pieces of machinery such as conveyor belts.
Plant and Equipment assets are depreciated according to their value and effective life as determined by the ATO.
Commercial Property Investors and Commercial Tenants Can Claim Depreciation Deductions
The ATO allows commercial property investors as well as its tenants to claim depreciation as a tax deduction if the property is used to produce income.
How Do Their Claims Differ?
Commercial property owners can claim depreciation deductions for the building’s structure as well as any assets they own within their property.
Commercial tenants, on the other hand, can claim tax depreciation deductions for any assets that they purchase and install during a fit-out.
What Is a Fit-Out?
Once the commercial tenant’s lease begins, and throughout the duration of the lease, tenants can claim depreciation for any assets that they add to the commercial building.
For example, if you add an airconditioning unit and a security system to the commercial property that you’re leasing, you’re entitled to claim depreciation on those assets.
Other fit-out examples include:
- carpet;
- fire fighting equipment;
- desks and shelves;
- vinyl; and
- blinds.
The same applies if you undertake any construction work on the commercial property that you’re leasing. You will be entitled claim depreciation deductions for the construction costs.
However, take note that, if a commercial tenant vacates the property and doesn’t remove the fit-out, the owner of the commercial property may be able to claim remaining property depreciation for the items. Although, this is entirely dependent on the lease conditions.
For example, the commercial lease may stipulate that all the fit-outs must be returned to the tenant in their original condition at the end of the rental period.
How Is Commercial Property Depreciation Calculated?
The depreciation is calculated differently depending on the type of commercial property concerned.
The ATO sets out the following depreciation rules for each commercial building according to their classification:
| Commercial Property Type | Travellers Accommodation (such as a hotel) | Non-residential (such as an office or retail shop) | Industrial (such as a factory or warehouse) |
| Rate of commercial property depreciation | Construction commenced between:
Construction commenced after:
| Construction commenced between:
Construction commenced after:
| Construction commenced after;
|
Commercial Property Depreciation Case Study
Milly purchased a commercial property in Bondi Beach in February 2020. The property is best suited as a restaurant space.
After having a Duo Tax Quantity Surveyor assess the property, the following was established:
- the property was built in 2007;
- it had tiled flooring, and
- there was a small kitchen area with marble benchtops.
After purchasing the property, Milly decided to fit-out the property with two more air conditioning units – one in the restaurant area and one in the small back office. She also installed some basic kitchen appliances. The total cost of the fit-out was $11,360.
In June 2020, Milly entered into a commercial lease with Marcus, who wanted to turn the space into a small vegan cafe.
Before opening his cafe, Marcus installed a few more essential cooking appliances and utensils and brought in tables, chairs as well as all the necessary cutlery, crockery and glassware. The total cost amounted to $31,000.
As the owner of the property, Milly can claim a commercial property tax depreciation deduction for the following items:
- capital works of the building;
- capital works of the marble benchtops;
- the tiled flooring;
- the two new air conditioning units;
- the newly installed kitchen appliance; and
- other existing plant and equipment assets.
If she purchased the property for $1.2 million, her yearly depreciation calculation would be as follows:
$1.2 million x 2.5% = $30,000
Milly can continue claiming a tax depreciation deduction amounting to $30,000 each year until 2047, provided that she still owns it and that it is used for income-producing purposes.
As the tenant of the property, Marcus can claim commercial property depreciation deductions for the:
- kitchen appliances and utensils;
- restaurant furniture;
- cutlery and crockery; and
- glassware.
What Is a Commercial Property Depreciation Schedule?
A depreciation schedule has a significant advantage of allowing owners and tenants of commercial properties to boost their cash-flow by maximising the tax depreciation deductions.
A property depreciation schedule is a report that details the tax depreciation deductions you can claim on your investment property.
However, to claim these deductions, you need to identify the value of a property and all its fittings and fixtures.
The purpose of a tax depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate.
This will give you a clear idea of how much you can claim.
It’s not just important to property investors though. When leasing commercial property, you should organise a tax depreciation schedule for the depreciation on your new fit-out and on any equipment that you’ve installed.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
