Commercial Tax Depreciation

Once their lease commences, and throughout its duration, tenants can claim depreciation for any assets that they add to the commercial buildings.

Common fit-out items include assets such as:

• • carpet;

• • security systems;

• • fire fighting equipment;

• • desks and shelves;

• • air-conditioning units;

• • vinyl; and

• • blinds

Tenants who undertake renovations to the commercial buildings can claim deductions for the construction costs.

It’s worth noting that if a commercial tenant vacates the property and doesn’t remove the fit-out that they installed during the duration of their lease, the property owner may be able to claim remaining commercial property depreciation for the items.

However, this is entirely dependent on what the lease stipulates.

In some cases, the rental agreement may require that all the fit-outs must be returned to the landlord in its original condition at the end of the lease.

Example

Lucy purchased a commercial property in Newcastle in March 2019. The property is best suited for retail use.

After having a Duo Tax Quantity Surveyors assess the property, it was determined that the retail property was built in 2005. It had timber flooring as well as a kitchen area with marble benchtops installed.

After purchasing the property, Lucy decided to fit-out the property with three air conditioning units – one in the kitchen, one in the restaurant and one in the small back office. The total cost amounted to $4,290.

In July 2019, Lucy entered into a lease agreement with Nick, who turned the space into a small bakery.

On commencement of the lease, Nick installed cooking appliances and specialised baking equipment amounting to $43,000. He also purchased restaurant furniture and tableware, which amounted to $7,400.

Lastly, he underwent small renovations in the front of the bakery, costing $3,800.

As the landlord of the retail space, Lucy can claim a commercial property tax depreciation deduction for the following items:

• • capital works of the building;

• • capital works of the marble benchtops;

• • the timber flooring;

• • the air conditioning units; and

• • other existing plant and equipment assets

As the tenant of the property, Nick can claim commercial property depreciation deductions for the:

• • kitchen appliances and specialised baking equipment amounting to $43,000;

• • restaurant furniture and tableware totalling to $7,400; and

• • renovations (as capital improvements) amounting to $3,800

Commercial property depreciation is calculated differently depending on the type of the commercial property concerned. The ATO sets out the various depreciation rules for each commercial building according to its classification.

A quantity surveyor’s assessment has a significant advantage of allowing owners and tenants of commercial properties to boost their cash flow by maximising the tax depreciation deductions. Simply put, a commercial property depreciation schedule is a report that details the tax depreciation deductions you can claim on your investment property. Claiming these tax-deductible expenses involves identifying 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 they have depreciated and will depreciate. This will give you a clear idea of how much you can claim. When leasing commercial property, it’s always important to organise a tax depreciation schedule for your new fit-out and the equipment you have installed. Are you an owner or the tenant of commercial investment property and currently not claiming commercial property depreciation? If so, fill out the form below to get an estimate of potential depreciation deductions from a Duo Tax specialist quantity surveyor for your accountant to review.