What commercial property investors should consider
Commercial property owners are often unaware they are entitled to make a claim for property depreciation.
Around 80 per cent of investors don’t take advantage of property depreciation and therefore miss out on thousands of dollars.
For commercial property owners, claiming depreciation is paramount as these deductions could provide the difference in income to turn what could be a negative cash flow property into an investment with a positive cash flow.
To help commercial properties owners earn more from their property, here are five facts about tax depreciation to assist them.
1. What is depreciation and what can be claimed?
The Australian Taxation Office (ATO) requires investors to report any income earned from a commercial property as part of preparing their income tax assessment.
Commercial investment property owners are entitled to claim depreciation.
Depreciation is a deduction available due to the wear and tear of a buildings structure (capital works deduction) and its fixtures and fittings (plant and equipment items) over time.
It is considered a non-cash deduction, meaning investors do not need to spend any money to be able to claim it.
2. No property is too old
Owners can claim capital works deductions for any commercial property built after the 20th of July 1982.
Despite restrictions the ATO place on capital works deductions based on the construction date of the property, the owner may be entitled to claim any recent renovations which have taken place since the 20th of July 1982, even if they were completed by a previous owner.
Depreciation of plant and equipment items can be claimed regardless of age.
Examples of plant and equipment items include carpets, air conditioning units, the hot water service, lights and light fittings.
A specialist Quantity Surveyor will conduct a site inspection to take pictures and make note of additions that have been made to the property as well as capturing all existing plant and equipment items.
They will provide an itemised tax depreciation schedule which outlines all the deductions available for the life time of the property (40 years).
If a commercial property owner is thinking of completing a renovation, they should also request their Quantity Surveyor to complete an inspection before and after the renovation takes place, as any removed items may be entitled to be written off as an immediate deduction.
3. Depreciation of fit out
Working out who is entitled to claim depreciation for certain items can be a complicated process when compiling a property depreciation schedule for commercial buildings.
Both owners and tenants have the right to claim depreciation entitlements when it comes to any fit-out installed in a property.
Commercial tenants are able to claim depreciation on any fit-out they add to a property.
These items include assets such as desks, blinds, shelving, carpet, vinyl, fire fighting equipment and security systems.
Commercial building owners also may be able to claim depreciation on any easily installed assets and any assets left behind by previous tenants once their tenancy has ceased.
If lease conditions mandate that tenants return a property to its original condition at the end of a tenancy, a specialist Quantity Surveyor can prepare a depreciation schedule conveying items which are removed or scrapped so these can be written off, escalating the left over value of these items so they can be claimed as a 100% deduction in the year of removal.
4. Choose a method of claims that works with your investment strategy
Once depreciation has been calculated, property investors can select from two methods by which to make their depreciation claim.
These are called the prime cost and diminishing value methods.
The intentions of the property investor can help to determine which depreciation method is most suitable for them.
Under the diminishing value method the deduction is calculated as a percentage of the balance you have left to deduct.
Under the prime cost method the deduction for each year is calculated as a percentage of the cost.
The method chosen depends on the long and short term strategy of the property investor.
If you claim using the diminishing value method, you are claiming a greater proportion of the assets cost in the earlier years, increasing deductions earlier.
Using the prime cost method spreads deductions out over time and works well for a longer term investment.
5. Consult with a specialist Quantity Surveyor
Calculating the depreciation for commercial properties can be quite a complex process, for this reason it is important to consult with a Quantity Surveyor who specialises in tax depreciation.
The ATO recognise Quantity Surveyors to be one of the few professionals with the appropriate construction costing skills to calculate the cost of items for depreciation purposes.
Quantity Surveyors are qualified under the Tax Ruling 97/25 and also gain access to the latest ATO rulings and information through their affiliations with industry regulating bodies.