Between March and June 2015, Newcastle has seen $38 million in commercial sales.
According to the latest BIS Shrapnel report, investment sales are expected to rise by 10 per cent over the next three years in a number of regional cities including Newcastle. With this boost in investment, commercial property owners would benefit from understanding the importance of property depreciation.
- What is depreciation?
Considered a non-cash deduction, commercial property and small business owners do not need to spend any money to be eligible to claim depreciation.
Depreciation deductions apply to all income producing properties in two ways. Deductions can be claimed for the depreciation of the building structure via a capital works deduction and for the plant and equipment assets contained within any income producing property.
In both small and large commercial properties, the Australian Taxation Office (ATO) allows capital works deductions to be claimed if construction commenced after the 20th of July 1982. Capital works deductions include the structural items of a building such as the bricks, tiling, roof and wiring. Depending on the age and purpose of the building, property owners can claim either 2.5% or 4% of the property’s historical construction cost. The owner may also be entitled to claim any recent renovations which have taken place within the ATO’s legislated dates, even if they were completed by a previous owner.
Depreciation of plant and equipment items contained within commercial properties depends on the individual effective lives of each asset as set by the ATO. Examples of these assets include counters, display cabinets, blinds and air conditioners. The ATO deems that assets used in some commercial industries will depreciate at a higher rate than they would in a residential property, or even within other commercial industries.
One example of an asset which does this is carpet, which is depreciated at a higher rate for restaurants and pubs than for a retail or office building, due to the additional wear and tear.
The ATO also allows tenants of commercial properties to claim depreciation on any fit-out they add from the starting date of their lease. Examples include desks, blinds, shelving, vinyl, firefighting equipment and security systems. If a commercial tenant removes items at the end of their tenancy, they may also be able to claim any remaining depreciation for items that are removed and scrapped when they vacate the property. This can become complicated to work out who is entitled to claim, as commercial building owners are also entitled to claim depreciation on assets installed and left behind by previous tenants once a tenancy has ceased.
- Case study scenerio
Max owns a commercial office building in Newcastle CBD, which was purchased for $1.1 million. He leases it to a tenant for $1,800 per week (totalling approximately $94,000 per year). His expenses (including interest, rates and management fees) total approximately $124,000 per year. Max engaged BMT Tax Depreciation to prepare a tax depreciation schedule, the first year showed a $40,000 deduction.
The below table shows how Max’s holding costs changed, without depreciation on the left and with depreciation maximised on the right. Depreciation deductions can make a huge difference to the cash flow of any investment property. By claiming property depreciation, Max has improved his cash flow by $231 per week.
No matter what type of income producing property that is owned, it is important to consult a specialist Quantity Surveyor to calculate the depreciation deductions available on a current or proposed property purchase. A Quantity Surveyor will prepare a tax depreciation schedule that can be used by the property owners’ Accountant when completing their annual income tax return.
If you would like more information, please contact one of BMT Tax Depreciation’s friendly staff on 1300 728 726, or visit the commercial property page by clicking here.