Commercial Tax Depreciation

Commercial Tax Depreciation

Similar to residential property, commercial property depreciation deductions can also be claimed.

What’s interesting about investing in commercial property is that there are substantial tax benefits for both the commercial property owners and tenants.

By equipping yourself with everything you need to know about commercial property depreciation, as a property owner or a tenant, you can save thousands of dollars each year.

What is Considered a Commercial Property?

Generally, a commercial investment property is a property built to operate a business from it. 

The property investors who own commercial property will generate their income from renting out space to commercial tenants.

The tenants generate their income from operating their business out of the property. 

Examples include: 

  • warehouses; 
  • restaurants; 
  • offices; 
  • shopping centres or shop fronts; and 
  • medical practices

What Is Commercial Property Depreciation?

As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.

The Australian Tax Office (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. 

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.
      Taking advantage of these commercial property tax depreciation deductions can result in a substantial cash flow benefit and optimised liquidity

What’s the Difference Between Commercial Property Investors and Commercial Tenants?

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 Commercial Property Depreciation of Fit-Out?

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 as a retail space. 

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

How Is Commercial Property Depreciation Calculated?

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

Commercial Property TypeTravellers 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: 

  • 22 Aug 1979 and 21 Aug 1984: 2.5% per year
  • 22 Aug 1984 and 15 Sep 1987: 4% per year
  • 16 Sep 1987 and 26 Feb 1992: 2.5% per year

Construction commenced after:

  • 27 Feb 1992: 2.5% per year

Construction commenced between: 

  • 20 Jul 1982 and 21 Aug 1984: 2.5% per year
  • 22 Aug 1984 and 15 Sep 1987: 4% per year

Construction commenced after:

  • 16 Sep 1987: 2.5% per year

Construction commenced after;

26 Feb 1992: 4% per year

Example: 

Using Lucy’s retail property example, the property was built in 2005, so the non-residential commercial property depreciation rate for construction commenced after 16 September 1987. 

If she purchased the property for $1.6 million, her yearly depreciation calculation would be as follows: 

$1.6 million x 2.5% = $40,000

So, Lucy can claim a tax depreciation deduction amounting to $40,000 each year until 2045, provided that she still owns it and that it is used for income-producing purposes.

What Is a Commercial Property Depreciation Schedule?

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 it has 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 commercial rental depreciation on your new fit-out as well as the equipment that 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 from a Duo Tax specialist quantity surveyor on how much you can save each year.

Get in Contact