How to substantially reduce your tax with commercial property


What is a commercial property?

A commercial investment property is a property that people run a business from. It is income generating for the owner, by the way of rents from commercial tenants.  A few examples of commercial properties are shop-fronts, warehouses, hospitality venues, hairdressers/barbers, industrial properties, child and aged care centers, medical and dental practices, and shopping centers.


What is commercial property depreciation?

Commercial property depreciation refers to the gradual wear and tear of a commercial building and its assets over time. Although a commercial building’s value may appreciate (over time, from an ATO and accounting perspective, as the building ages and assets quality declines, they lose a percentage of their value each year.  This annual decline in value is called capital allowance and depreciation and is claimable as a tax deduction for the property owner when completing their tax returns each financial year.


Who can claim for depreciation on commercial property?

The landlord and the tenant can both claim depreciation on commercial property. It is extremely contextual, with the landlord usually being able to claim depreciation for the structural and original building components.

Tenants usually claim depreciation for the building fit-out (if they have paid for it).


How is depreciation on commercial property calculated?

Depreciation differs in calculation for different types of commercial buildings. Buildings are classified according to their use, and the ATO has set out the specific rules for each building classification. Factors that vary according to classification include different qualifying periods and different effective lives (and therefore rates of depreciation) for the buildings.


When should I get a commercial property depreciation schedule?

There are a few instances where a bell should ring in your mind, triggering you to get a commercial property depreciation schedule. These alarms should be going off when you purchase a commercial property, negotiate a new lease or renovate/refurbish your property.

Depreciation is calculated from the building’s construction cost and has nothing to do with the purchase price or valuation. It is extremely important to get a quantity surveyor in when you first purchase to calculate the construction cost of the building historically and forecast your deductions for the remaining effective life.

If, as part of the lease negotiations, you agree to provide some fit-out or assets to the tenant, you will need to have your depreciation schedule updated to include those additions.

If you have completed substantial renovations or refurbishments, your depreciation schedule should be updated. This includes things such as building additions and improvements, electrical rewiring, re-plumbing, and hard landscaping.

An updated depreciation schedule is also relevant when you improve plant and equipment within your building/property. Things like air-conditioning, security systems, and hot water installations are extremely important to ensure they are included in your depreciation schedule.


Are depreciation schedules tax-deductible?

The cost of generating a tax depreciation schedule is 100% tax deductible. We encourage you to consult with us directly about how you may best approach this aspect of the process. As you can readily claim the cost of engaging a quantity surveyor against your annual tax exposure.

If you think you are missing out on commercial depreciation deductions, contact Link Advisors and we can provide you with our thoughts.