Commercial facilities come in all shapes and sizes such as multi-story office towers, solar farms, gyms and restaurants.
Many factors can affect the profitability of a commercial building and the business operating from it. One of the most constant and reliable sources of cash flow is the depreciation deductions that both owners and tenants can claim.
In this article we will look at:
- What is depreciation of a commercial facility?
- How can both commercial owners and tenants claim depreciation?
- How is commercial property depreciation claimed?
- Determining plant and equipment depreciation based on the commercial industry
- Benefits of investing in a commercial property
- Renovating a commercial property
- What happens when selling a commercial property?
- Claim the most commercial property depreciation with a specialist
What is depreciation of a commercial facility?
Property depreciation is the wear and tear of a building’s structure and assets over its lifetime. Depreciation is a natural process and commercial owners and tenants can claim this depreciation as a tax deduction.
For commercial owners, depreciation can boost cash flow by thousands each year. Depending on the type of building, lifetime depreciation deductions can fall into the hundreds of thousands, sometimes millions, of dollars.
How can both commercial owners and tenants claim depreciation?
Commercial owners can claim depreciation for the natural wear and tear that occurs to a building’s structure and its fixtures and fittings over time. Some common deductions that BMT find commercial owners includes the buildings walls, doors, roof, bathroom fixtures, sheds, roads and driveways.
Depreciation deductions for commercial tenants work differently. They only claim depreciation for the assets they own within a property. BMT find many different deductions for commercial tenants based on their industry. Common deductions include desks, shelving and power tools.
Sometimes an owner also occupies the commercial building. For example, a mechanic may own the workshop that he operates his business from. In these instances, the mechanic can claim all deductions available on both the building’s structure and assets held by the business.
How is commercial property depreciation claimed?
The building structure and any fixed assets are claimed under capital works deductions. Where constructed commenced after 20 July 1982, capital works can be claimed at a rate of 2.5 per cent per year. These deductions are available for the lifetime of the property, which can change based on the industry. Some industries that face increased wear and tear can claim a higher rate of 4 per cent.
Easily removable fixtures and fittings, or those that are mechanical in nature, can be claimed as a plant and equipment deduction. Plant and equipment assets are common in a tenant’s fit out and depreciate at a rate based on their effective life which is set by the Australian Taxation Office in TR2020/3. There are also a number of depreciation incentives available for plant and equipment assets including temporary full expensing and and low-value pooling.
Determining plant and equipment depreciation based on the commercial industry
As mentioned, plant and equipment deductions can be depreciated throughout their effective life at a rate based on the commercial industry. Let’s look at how this works.
|In practice: Depreciation rates in different industries
Jen is a business owner and commercial investor with a portfolio consisting of a number of different types of commercial buildings. A café and retail gift store are two properties within her portfolio. In 2018, Jen decided to install new carpets in her café and retail store. Following this, she organised an adjustment to be made to her tax depreciation schedule for each property. Doing so ensured that she could claim depreciation on the new carpets.
She found that while both carpets are very similar and valued the same, each depreciate at different rates. Using the diminishing value method, the café carpet has an effective life of five years and therefore depreciates at a rate of 40 per cent, while the carpet in the retail store has an effective life of eight years and therefore depreciates at a rate of 25 per cent.
Benefits of investing in a commercial property
For property investors, there are two key benefits of investing in commercial property.
1. Long leases available
Commercial properties are generally leased by tenants on longer leases than residential properties. Some leases can span across five to ten years, or even decades. Longer leases can ensure that the investor has a strong and reliable cash flow trajectory that helps their future planning.
2. Diversified and flexible portfolio
The current economic climate has made the importance of having a diverse investment property portfolio more apparent than ever before.
Commercial investment properties offers the owner many more possibilities than residential properties can. Not only can owners spread their properties across location, the commercial industry also allows them to hold different property types across many industries. They also have the potential to be repurposed to meet current consumer trends and preferences.
Renovating a commercial property
A commercial property renovation provides many benefits for the owner, including increased depreciation deductions.
Any assets removed during a renovation are ‘scrapped’. Scrapping allows them to claim any residual value of removed assets in the same financial year. This is in addition to the first year deductions of the newly installed assets.
The same applies for removed tenant fit-out. If the tenant is required to remove their fit-out at the end of their lease, they can scrap these assets and claim further deductions for that financial year.
Completing a structural renovation lets owners claim capital works deductions on their older properties. Even if the property was originally constructed before 20 July 1982, they can still claim deductions on any new capital works renovations they have completed, plus any renovations completed by previous owners.
What happens when selling a commercial property?
When an owner of a commercial building sells the property and makes a capital gain, they may have capital gains tax (CGT) liabilities.
CGT is a type of tax you pay on the capital gain made from the sale of an income-producing asset. Many factors play into the amount of CGT payable and a number of discounts and exemptions are in place.
If the owner is also classed as a small business owner, they may be eligible for a number of small business CGT concessions. Some of the concessions include the 15-year exemption, 50 per cent active asset reduction, retirement exemption and rollover.
Claim the most commercial property depreciation with a specialist
BMT Tax Depreciation has completed thousands of commercial tax depreciation schedules across all different types of industries. BMT ensure that all claims are maximised, and every rule is applied so that compliance is maintained.
To learn more about BMT’s commercial services, Request a Quote of contact the team on 1300 728 726.