Starting a new business can be quite daunting, particularly if you’re trying to do so within a strict budget.
On top of other initial start-up costs such as purchasing stock or merchandise, arranging insurance, budgeting for staff overheads and (if you don’t own the building) allocating funds to pay rent, there are often costs involved in installing assets to fit-out the new space before you can open the doors for business.
What commercial property tenants 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.
As a building gets older and the items within it age, they depreciate in value. The Australian Taxation Office (ATO) allows commercial tenants and building owners to claim deductions for the wear and tear of the structural and fixed items within a property as well as for the easily removable plant and equipment items contained within the property.
Depending on the construction commencement date, the type of commercial property and its use, capital works deductions can be claimed at a rate of either 2.5% or 4% by the owner each year for any structural or fixed items contained within the property.
When depreciation is being applied to removable plant and equipment items within a property it becomes far more complicated. This is because both the owner and the tenants of the property can claim deductions for the depreciation of items.
Commercial tenants are able to claim depreciation for any fit-out they add to a property once their lease starts.
Examples of common business assets installed during a fit-out include:
- Air-conditioning units
- Fire fighting equipment
- Shelving and
- 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 individual effective 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, if a tenant’s lease stipulates that the property must be returned to its original condition at the end of the lease, 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.