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Commercial property depreciation offers reliable cash flow

BMT team — Tue, 21 Jul 2020 00:00:46 +0000

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 […]

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Help your garden centre business blossom

BMT team — Thu, 14 Dec 2017 00:28:30 +0000

Nursery and garden centre owners may be seeing a growing demand for a more diverse range of plants and gardening supplies. A recent campaign from Nursery and Garden Industry Australia suggests Australians are looking to improve their health and wellbeing by placing plants in their homes while also becoming more interactive with new technology. As such, owners of nurseries could be looking to purchase new assets that will cater to this additional stock and improve how their plants and garden supplies are displayed. However, acquiring these new items can often be a costly business expense. The good news is that these costs can be minimised if the business owner claims depreciation. The Australian Taxation Office (ATO) allows commercial property owners and their tenants to claim depreciation deductions related to the wear and tear of a building and any plant and equipment assets contained within. Garden centre owners and tenants can claim depreciation for a number of assets commonly found on such premises including shelving, watering systems, computer equipment, work benches, trolleys and ladders, as well as more standard commercial assets such as sinks, windows, bricks and mortar. The table below showcases the depreciation available for a nursery purchased for $950,000. As you can see the nursery owner was able to claim $38,003 in deductions in the first full financial year and $383,934 in deductions over the life of the property. These deductions are quite significant and should not be overlooked, given the difference they can make to a business owner’s cash flow. When it comes to commercial properties, both owners and tenants are able to claim depreciation. Owners are entitled to claim deductions relating to the building structure and any fixed assets and plant and equipment they own, while tenants can claim on any fit out they install after commencing their lease. The fee for preparing a tax depreciation schedule is 100 per cent tax deductible To learn more about claiming depreciation for any commercial property, visit our commercial property depreciation page.

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Claiming depreciation essential to the health of medical centres

BMT team — Thu, 23 Nov 2017 03:15:12 +0000

Many medical centre owners are unaware that the Australian Taxation Office allows them to claim depreciation deductions based on the wear and tear of their building and the plant and equipment assets contained in the property. Because of this, many of these owners are losing thousands of dollars annually by failing to have a tax depreciation schedule prepared for property or place of business. Research conducted by BMT Tax Depreciation highlights this lack of awareness around the depreciation deductions available for medical centre owners and tenants. In the last financial year there was a -7.55 per cent decrease in depreciation schedules requested for those who own or lease a medical centre. Items commonly found in medical centres including computer equipment, surgical instruments, treatment beds, instrument washers and medical refrigerators are all depreciable, as are other more generic assets such as air conditioning units, shelving, desks, security systems and free standing furniture. BMT Tax Depreciation specialise in maximising depreciation deductions to ensure investors put more money back in their pockets. By obtaining a BMT Tax Depreciation Schedule, property investors – including medical centre owners and tenants – can rest assured that all available depreciation deductions are found and can be claimed in their tax return each year. Below is an example of the deductions available to medical centre owners and tenants. As this example shows, the depreciation deductions for medical centres can be quite substantial and should not be overlooked. In the first full financial year alone, the owner of this property could claim $85,157 in depreciation deductions. In the first five years, they can claim $255,090. And over the life of the property, the owner was able to claim $709,163. The fee for a schedule is 100 per cent tax deductible. To learn more about claiming depreciation for any commercial property, visit our commercial property depreciation page.

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Why shopping centre owners should try on depreciation for size

BMT team — Fri, 15 Sep 2017 02:27:11 +0000

The face of retail has changed dramatically in recent years. With the rise of online shopping, the arrival of international brands, climbing rents and challenging economic conditions, some shopping centres have started to feel the pinch as these factors affect their bottom line. While consumer spending jumped by 0.7 per cent during the June quarter, household savings was at a nine-year low. This could potentially lead to a decline in retail sales in future. With these factors in mind, it’s important that retail store owners and tenants manage their money wisely. One of the simplest but often overlooked ways that shop owners and tenants can improve their cash flow is by claiming depreciation. The Australian Taxation Office (ATO) allows commercial property owners and their tenants to claim depreciation deductions related to the wear and tear of a building and any existing plant and equipment assets contained within it. Owners are entitled to claim deductions relating to the building structure and any fixed assets and plant and equipment items they own. This can include assets such as bricks, mortar, roofs, basins and car parks. Tenants, on the other hand, are able to claim depreciation on any fit out they install after commencing their lease. This can include anything from clothing racks, counters, light fittings, shelving, security systems, mannequins and fitting room chairs. It’s important for shopping centre owners and their tenants to contact a specialist Quantity Surveyor to discuss what deductions can be claimed. Given that both parties can claim deductions at the same time, both owners and tenants should contact a specialist Quantity Surveyor to each request a depreciation schedule, so each party is maximising the deductions they’re entitled to. As part of the process of arranging a depreciation schedule for any commercial property – including shopping centres – our specialist staff will perform a site inspection to uncover the structural and fixed items that can be claimed as capital works deductions, as well as all of the removable plant and equipment assets contained within the property. They will also uncover any renovations that have been completed to the property, even if they were completed by a previous owner. If a shopping centre owner is intending to undertake any renovations or improvements in the near future, is also important to be aware that they may be able to claim additional deductions for this. For this reason, a schedule should be completed both before and after an renovation works so the owner can claim deductions for the remaining un-deducted depreciable value of any assets removed during the renovation and also include deductions for newly installed assets. By obtaining a BMT Tax Depreciation Schedule, owners and tenants will reduce their tax liability and therefore improve their cash flow. The fee for a tax depreciation schedule is also 100 per cent tax deductible.

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Physiotherapy clinic owners can muscle up more money by claiming depreciation

BMT team — Tue, 20 Jun 2017 00:49:21 +0000

Many owners of physiotherapy clinics are unaware that the Australian Taxation Office allows them to claim depreciation deductions based on the wear and tear of their building and the plant and equipment assets contained in the property. As such, many physiotherapy clinic operators are losing thousands of dollars annually by failing to have a tax depreciation schedule prepared for their property. Items commonly found in physio clinics including treatment beds, resistance training machines, cardiovascular training machines and computer equipment are all depreciable, as are other more generic assets such as air conditioning units, freestanding furniture, flooring, signing and security systems. It’s essential to contact a specialist Quantity Surveyor such as BMT Tax Depreciation to arrange a tax depreciation schedule to ensure the available deductions for these items can be claimed. The following is an example of the deductions we found for an owner of a physiotherapy clinic purchased for $620,000. As this example shows, the depreciation deductions for this type of property can be quite substantial and should not be overlooked. In the first full financial year alone, the owner of this property could claim $19,500 in depreciation deductions. Over the life of the property, the owner was able to claim $311,700. As part of the process of arranging a depreciation schedule for any commercial property – including physiotherapy clinics – our specialist staff will perform a site inspection to uncover the structural and fixed items which can be claimed as capital works deductions, as well as all of the removable plant and equipment assets contained within the property. They will also uncover any renovations that have been completed to the property, even those completed by a previous owner. If a physiotherapy clinic owner is intending to undertake any renovations in the near future, is also important to be aware that they may be able to claim additional deductions for this. A depreciation schedule should be arranged prior to commencing any renovation work and updated after the renovation is complete. This will ensure the owner can claim deductions for the remaining un-deducted depreciable value of any assets scrapped and removed during the renovation and also include deductions for newly installed assets. To learn more about claiming depreciation for any commercial property, visit our commercial property depreciation page.

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The eleven benefits of investing into commercial properties

Chan Naylor Team — Tue, 07 Mar 2017 04:53:24 +0000

Investing in commercial properties is not the same as investing into residential properties. There are different dynamics driving commercial properties to residential properties. Here we’ll discuss the eleven benefits of investing in commercial properties. Rental returns The rental return for owning a commercial property is generally better than residential properties and is easier to achieve a neutral return. For example, you can generally achieve a 6 per cent net annual return whereas residential properties would only achieve a 2 per cent to 3 per cent net return after deducting all the other costs such as council and water rates, repairs, land tax etc. Renting an office location versus owning one If you have a business and you are leasing an office; you’d be better off by buying your factory or office through your Self-Managed Superannuation Fund (conditions apply). Instead of paying rent to the landlord, you can effectively pay that rent back to yourself via your SMSF. Rent paid by your company is tax deductible at 30 per cent and when it goes into your SMSF it’s only taxed at 15 per cent. Capital gains are only taxed at 10 per cent. Contribution limits Where there is a limit on how much you can contribute into your SMSF as your Super contribution, there is no limit on how much rent you can pay as long as the rental price is within market rates. Depreciation value Commercial properties have much more generous depreciation rates than residential properties. This is extremely tax effective. Tax free return If you want to earn $200,000 a year (completely tax free), just buy a commercial property that has $200,000 in depreciation. Effectively $200,000 of your received rental will become tax free. Leveraging your commercial properties The ability to leverage your assets via the use of debt is an extremely effective strategy. Example, you have $200,000 cash deposit and you could borrow $400,000 at an LVR of 67 per cent you can buy a commercial property at $600,000. You now have $600,000 working for you instead of $200,000. Assume (a) capital growth is 5 per cent per annum and (b) rental return of 6 per cent per annum (c) Interest rate of 5 per cent In very broad terms the rental basically covers interest (neutrally geared in this example) and if we achieve capital growth of 5 per cent ($30,000 per annum) we are able to achieve a 15 per cent return on our cash of $200,000. ($200,000/$30,000) Caution Some properties do not achieve any capital gains including some residential properties. It’s all about property selection. Property leasing options Tenants are generally businesses and they prefer to sign long term leases such as 5 x 5. Meaning it’s signed for five years with an option for another five years. Commercial property leasing terms Many leases require the tenant to pay all outgoings so the rental received by the landlord is net. Percentage of rental increase is tied to the capital growth Many leases have clauses that give the landlord an automatic rental increase of 4 per cent per annum or Consumer Price Index (CPI) whichever is the highest. This means the capital growth of the property is also tied to the rental increases. Commercial property valuations are more clinical than residential properties In the main It’s closely tied to the rent. For example: If the rents were $60,000 per annum and the market was paying a 6 per cent return on investment it the n simply values the property at $1m ($60,000 divided by 6 per cent).However, if there was a lot of demand for the property and investors were willing to accept a 5 per cent per annum return the property value would be worth $1.2m ($60,000 divided by 5 per cent). If rents reduced to $50,000 per annum and assuming a 6 per cent return is expected than the property would have reduced in value to $833,333 ($50,000 divided by 6 per cent) If rents fell to $50,000 and returns dropped to 5 per cent per annum than the property value would have increased to $1 million ($50,000 divided by 5 per cent). As you can see it’s a lot less emotional than residential properties where residential properties are valued by comparable sales. www.chan-naylor.com.au Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

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