When hoteliers request a tax depreciation schedule for their property, there are usually three main scenarios:
- Freehold, which is where the client owns the building only, not the business that operates from it
- Leasehold, where the client owns the business only, not the actual property
- The client owns both the business and the building
Depending on which of these situations apply, how depreciation can be claimed will vary.
Let’s consider how depreciation can be applied in each of these situations.
It’s important to remember that for any commercial property, both the tenant and the landlord or owner are eligible to claim depreciation.
Scenario 1 (Freehold)
In a freehold scenario, the client owns the actual building or the property, but the not the hotel business that operates from it.
As such, they are generally entitled to claim the capital works deduction, which relates to the structure of the building, as well as any fixed assets they own as landlords which may include items such as hot water systems, air conditioning systems and carpets.
They will not be entitled to claim depreciation deductions for any plant and equipment assets owned or installed by the hotel operator. This may include assets such as furniture, linen and cutlery.
As legislated by the Australian Taxation office (ATO), the owner of any commercial building or hotel constructed after the 20th of July 1982 will be able to claim the capital works deduction over a forty-year period.
Depending on the date of construction, either 2.5 per cent or 4 per cent of the property’s historical construction cost per year can be claimed as the capital works deduction.
Scenario 2 (Leasehold)
In this situation, the client owns the business only; not the actual building. As such, they can be viewed as the “tenant”. BMT Tax Depreciation has found that in most situations like this the client has purchased an already established and operating business.
Whether they have purchased an established business or have started it from scratch, they would be able to claim depreciation for any plant and equipment assets they own or any new assets purchased for the hotel fit out. This may include assets such as bedding, linen, tables and chairs, reception furniture, glassware and cookware.
These assets all have an effective life and will depreciate at a set rate, as determined by the ATO.
Being in a leasehold agreement, they will not be able to claim the capital works deduction, as this sits with the building owner. Nor will they be able to claim any plant and equipment assets owned by the owner or landlord.
Scenario 3 – They own both the business and the building
Usually (but not always) in this scenario, there are separate entities to take into consideration. There may be one entity that owns the building, perhaps a trust, and another that owns the business and any associated plant and equipment assets.
The same rules as above would apply when claiming depreciation in this scenario. The benefit is that overall, they would be eligible to claim both the capital works deduction and depreciation deductions for plant and equipment assets.
How a tax depreciation schedule can help
When a property owner and hotel operator are both claiming depreciation for various assets in the same building, things can quickly get confusing. It can be hard to determine who owns what and what each party can legally claim depreciation for.
There is where the value of a professional Quantity Surveyor is realised.
A Quantity Surveyor will help either or both parties identify the assets they’re legally entitled to claim deprecation for and will maximise the depreciation deductions available for both parties.
This will also help ensure legal compliance when it comes to claiming depreciation, in the case of an ATO audit.
If either of these scenarios apply to you as a hotel owner or operator, you can visit our commercial property depreciation page for more information.