Commercial property is increasingly becoming a sought after investment option for Australian investors.
It’s no surprise this is the case as commercial property offers potential capital growth and can result in excellent rental yields for investor purchasers. The benefits don’t just stop there. Regardless of the type of property or its age, owners of all commercial properties are eligible to claim significant deductions in the form of depreciation.
Despite this fact, many commercial property owners are unaware of the benefits of claiming depreciation and therefore miss out on thousands of dollars in deductions each financial year.
‘So what is depreciation’, you ask? As a building gets older and the items within it age, they depreciate in value. The Australian Taxation Office (ATO) allows the owners of any income producing property to claim deductions relating to the wear and tear of the structure of the building (capital works deductions) and the plant and equipment assets contained within it.
By claiming depreciation, a commercial property owner essentially reduces their taxable income and therefore will put more money in their pocket, increasing their available cash flow.
What are capital works deductions?
These are deductions relating to the structural element of a building and are based of the historical cost to build the property. Examples include walls, flooring, mezzanines, tiling, doors, windows and electrical wiring. Legislation states that deductions for capital works can be claimed for any building in which construction commenced after the 20th of July 1982. However, this doesn’t mean that owners of commercial properties constructed prior to the 20th of July will not benefit from capital works deductions. Older properties have often undergone renovations and any work of a structural nature completed within the legislated dates may entitle the owner to capital works deductions, even if the work was completed by a previous owner of the property.
What is plant and equipment depreciation?
Plant and equipment depreciation can be claimed for any mechanical or removable assets contained within an investment property. For commercial property owners, there is a wide variety of items which are eligible, particularly as the assets contained in a building will vary significantly depending on the buildings use and industry.
The ATO identify over 1,500 plant and equipment assets. Examples of those commonly found in all types of commercial properties include hot water systems, smoke alarms, fire extinguishers, air conditioners, carpets and light shades. There are also a number of industry specific assets identified such as those used for hospitality, medical or manufacturing equipment.
Each asset identified is assigned an individual effective life. Unlike capital works deductions age is not a factor when calculating depreciation for plant and equipment assets, rather it is the condition and quality of each item which contributes to the depreciable amount.
Can depreciation help you make purchase decisions?
Before purchasing a commercial property, it helps to consider the depreciation deductions that will become available once the property is income producing.
While astute investors usually consider the potential return of a property, surrounding commercial infrastructure, rental vacancy rates in the immediate area, historical growth and the current tenancy contract in place, few consider their after tax situation when buying.
Working out the tax deductible costs including property management fees, rates, interest, repairs, maintenance, fit out costs and depreciation will provide a better perspective of the affordability of a property and the future cash flow position for the commercial property investor.
Quantity Surveyors who specialise in building depreciation can provide a detailed tax depreciation estimate for any type or property an investor is considering purchasing. Let’s examine a before and after depreciation scenario to see how claiming depreciation will make a difference to an investors cash flow. The investor is considering purchasing a commercial office building for $820,000.
The investor had completed some preliminary research by asking a Property Manager for a rental appraisal of the property they were considering. The expected rental income for the property was $1,050 per week, or $54,600 per year.
They were also able to estimate the costs involved in owning the property. Expenses such as interest rates, property management fees, rates, repairs and maintenance costs totaled $57,088 per annum.
A free assessment of the estimated depreciation deductions from a specialist Quantity Surveyor suggested the investor could expect to claim around $40,080 in depreciation deductions in the first full year.
The following table provides a summary of these costs and a projected annual position, depending on whether or not depreciation is claimed.
Without claiming depreciation, the commercial property owner would experience a loss of $30 per week during the first year of owning the property. By claiming depreciation the property owner will receive a return of $255 per week, a difference of $285 per week or $14,829 for the first financial year refund. The benefits to the investor’s cash flow are clear. Depreciation will reduce the investor’s taxable income and by crunching the numbers prior to making a purchase, it will certainly help them with making their purchase decision.
Once purchased, how should you go about claiming depreciation?
Once an investor has purchased a property, it is recommended to contact a specialist Quantity Surveyor immediately on settlement. Quantity Surveyors are recognised under Tax Ruling 97/25 as one of the few professionals with the expert knowledge necessary to calculate construction costs for depreciation purposes.
They will use their skills to complete a comprehensive tax depreciation schedule outlining all of the deductions available for the property. This process involves completing a detailed site inspection of the property to take measurements and photograph each of the depreciable plant and equipment assets found in the property.
Once completed, the schedule can be used by the commercial property owner when visiting their Accountant to process their annual income tax assessment. The Accountant will use the schedule to claim the maximum legitimate deductions for the client.
For more information about property depreciation, commercial property owners can visit the BMT Tax Depreciation website and view the commercial property owner’s page by clicking here.
Investors who would like an estimate of the potential deductions for any commercial property can also speak with one of the expert staff at BMT Tax Depreciation on 1300 728 726 today.