Did you know that both owners and tenants can benefit from the depreciation of a property? It’s something too many commercial property owners haven’t even considered, but it’s worth knowing about for tax purposes.
It’s always important for commercial property owners to take advantage of depreciation deductions. These deductions can be quite lucrative and make a significant difference to a commercial property owner’s cash flow.
So how do you go about working out and claiming the depreciation of a fit-out?
We have put together some valuable information to share with you about the depreciation of your commercial property and how it can benefit you. To fully realise these benefits, a number of steps are involved in the process.
Who can claim depreciation on the fit-out?
The owner of the fit-out (the person or entity who paid for it – brand new or second-hand) is entitled to claim tax deductions for the depreciation of the fit-out under Division 43 (building) and Division 40 (plant and equipment) of the ATO legislation.
This means that even if you lease your premises, any building works you have done or any plant and equipment assets you have added are able to be claimed by you as capital works and depreciation when you do your business financials.
General depreciation rules
To calculate your depreciation deduction for most assets, you apply the general depreciation rules (unless you’re eligible to use simplified depreciation for small businesses). These rules set out the amounts (capital allowances) that can be claimed based on the asset’s effective life.
Under the general depreciation rules, an immediate write-off applies to the following:
- items costing up to $100 used to earn business income (but note the higher immediate write-off limit for small businesses below)
- items cost up to $300 and are used to earn income other than from a business (such as employer-provided tools and equipment).
Simplified depreciation rules
Small businesses can choose to use the simplified depreciation rules – which include the instant asset write-off.
Other depreciation rules
Different rules apply to:
Capital Works – which are written off over a longer period than other depreciating assets
Other Business Capital Expenses – such as the cost of setting up or ceasing a business and project-related expenses.
Depreciation deductions are generally available only to the legal owner of the asset. However, hire purchase arrangements are generally treated as a notional sale of goods. In this case, the hirer rather than the legal owner is entitled to the deduction. Depreciation deductions for partnership assets are claimed by the partnership, not the individual partners.
How to maximise your claim?
To ensure depreciation deductions are maximised, both owners and tenants of commercial properties should contact a specialist Quantity Surveyor, such as BMT Tax Depreciation, to arrange a tax depreciation schedule.
And that’s because a Quantity Surveyor can provide two separate schedules for the owner and the tenant, which outline the deductions available for each party.
These deductions will benefit both parties and help them to improve their cash flow and reduce their annual holding costs.
Let’s take a look at an example of a business owner (tenant) who rented a space and installed a range of fixtures and fittings to fit the space out as a luxury clothing store.
What does it mean when I claim depreciation on my fit-out?
Claiming depreciation of your fit-out means you are claiming a tax deduction for the ageing and wearing out of the building works and assets over time. Your accountant will simply include the calculated depreciation amount in your business financials as an expense. The great thing about this expense is that you have paid for the building and assets already anyway, so there is no further expense required to make the claims. Increasing your expenses reduces your taxable profit and, therefore, your tax payable at the end of the financial year.
How is the depreciation calculated?
Depreciation is calculated off a construction cost (for Division 43 building works) and off professional valuation (for Division 40 Plant and Equipment items). Building costs include not just materials and labour but also preliminary expenses and consultants fees. Division 40 assets are valued at a total installed cost (not just the receipted cost of the asset).
DEPRECIATION CAN HELP YOU REDUCE FITOUT COSTS
Are you moving premises? Or just thinking about updating an old, tired fit-out?
Planning your new office can be quite daunting, particularly if you’re trying to do so within a strict budget.
Whether you are moving to new premises or simply refreshing an old fit-out, on top of all the other usual business costs such as insurance, staff overheads and (if you don’t own the building) rent, there will also be substantial costs involved in installing assets to fit-out the new space before you can open (or re-open) the doors for business.
What some business owners are often unaware of is that they are entitled to claim deductions in the form of depreciation for many of the assets installed during the fit-out of a property. The Income Tax Assessment Act 1997 allows you to claim deductions for the wear and tear of the plant, equipment and other items that you have had installed as part of an office fit-out once the lease starts.
Examples of common business assets installed during a fit-out include:
- Internal walls
- Air-conditioning units
- Firefighting equipment
- Security systems
The owner can also simultaneously claim deductions for any plant and equipment items originally contained within the property.
Each plant and equipment item should be depreciated based on its effective individual life as set by the ATO for the item’s owner. However, some assets will also entitle the owner to claim an immediate write-off or to add them to a low-value pool to increase deductions sooner if they meet certain requirements as outlined by the ATO.
Depending on lease conditions, if a tenant vacates a building and does not remove the fit-out from the building, the owner of the property may still be able to claim any remaining depreciation for these items. However, suppose a tenant’s lease stipulates that the property must be returned to its original condition at the end of the lease. In that case, the tenant can benefit by claiming any remaining depreciation on the items which are removed and scrapped from the property.
To ensure that depreciation deductions are maximised for both owners and tenants, it is recommended that both parties request a quote to arrange a tax depreciation schedule. We can provide separate schedules for the owner and the tenant, which will outline the deductions available for each party.
These deductions can be beneficial to both the tenants and the owner of the property in improving their cash flow and in reducing the annual costs of renting or holding the property.
These deductions can be extremely beneficial to you in improving cash flow and reducing the annual costs of renting the property, and paying for the fit-out itself!
What if I don’t know the costs of my fit-out?
If you don’t have all the invoices and receipts for your fit-out, or you have purchased the fit-out as part of a business acquisition, that is no problem. Quantity surveyors (those who are registered as tax agents) are recognised by the ATO as appropriately qualified to estimate building works and value plant and equipment assets to calculate depreciation.
Accountants and real estate agents are not recognised by the ATO to estimate construction costs for depreciation purposes. The most effective way to maximise your deductions and cash return is to have a depreciation schedule prepared by a qualified and registered quantity surveyor.
The truth of the matter is most business owners are far too busy to school upon capital allowances. So we make it easier for you by overseeing your entire fit-out project from start to finish.
If you ever need help juggling the lucrative legal of your upcoming fit-out, reach out to us, we have a team of specialised professionals for a free concept and pricing service.
Depreciation refers to the decrease in the value of assets over time due to wear and tear, ageing, or obsolescence. In Australia, the Australian Tax Office (ATO) allows businesses to claim tax deductions for this depreciation, including for office or shop fit-outs. Here’s a general guide on how to claim depreciation for a fit-out:
- Understand Depreciation Rules: The ATO allows deductions for the decline in value of depreciating assets (e.g., fixtures, fittings, or equipment involved in a fit-out) that you use in earning assessable income.
- Fit-Out Depreciation: The fit-out of a shop or office can be considered a capital expense. As a capital expense, the cost of the fit-out can’t be claimed in the year it occurs. Instead, it can be written off over a longer period (depreciated).
- Immediate Write-Offs: As per the ATO’s rules, you may be able to immediately write off the cost of each asset that costs less than the threshold amount.
- Depreciation Rates: Different assets have different effective lives and hence different depreciation rates. For instance, the useful life of ‘Shop fit-outs’ for tax depreciation purposes is specified by the ATO as 7 years. It is always advisable to consult the ATO’s guide on the effective life of depreciating assets or a tax professional to confirm the depreciation rate that applies to your specific situation.
- Claiming the Deduction: You can claim the deduction when you file your business’s tax return for the income year in which the decline in value occurs.
- Professional Advice: It’s recommended to engage a quantity surveyor or tax professional who can conduct a depreciation schedule. This schedule will detail the tax depreciation available on your fit-out, ensuring you claim your full entitlements.
This is a simplified overview of how depreciation for a fit-out works. Here are a few more points that could be important:
- Pooling Assets: The ATO allows small businesses to pool assets to simplify tax returns. Assets with a longer useful life are depreciated at 15% in the first year and 30% in subsequent years. This can be beneficial for expensive, long-lasting fit-out elements.
- Capital Works Deductions: Some fit-out expenses may qualify for a capital works deduction, which covers the building’s structure and items permanently fixed to the property. These are generally written off over a 40-year period.
- Record Keeping: It’s crucial to keep accurate and detailed records of all fit-out expenses. These records should include the date of purchase, cost, and a brief description of the asset. You’ll need these to make a claim and in case of an audit.
- Updates to Rules: The ATO often updates rules regarding depreciation, including the instant asset write-off threshold and eligibility requirements. Always check the latest regulations or consult a tax professional to ensure you’re up-to-date.
Remember, tax laws can be complex, and every business situation is unique. It’s always best to consult with a tax professional or a Quantity Surveyor who can provide tailored advice based on your specific circumstances. They can ensure you claim the maximum allowable depreciation for your fit-out and stay compliant with all ATO rules and regulations.
The information provided here is intended as a general guide only and does not constitute professional tax advice. Always consult with a tax professional for accurate information.