January 12, 2025
Each year, many commercial property investors miss out on significant tax savings by not claiming full depreciation. Many remain unaware of the substantial deductions available under the Australian Taxation Office (ATO) guidelines for commercial property depreciation.
This guide explains the essentials of commercial property depreciation, highlights its benefits, and demonstrates how TDQS can help you maximise deductions—even recovering missed claims from prior years.
What is Commercial Property Depreciation?
Commercial property depreciation is a tax deduction available to investors. It reflects the wear and tear or “ageing” of a building’s structure and its assets over time.
While commercial properties may increase in market value, their physical components—such as HVAC systems, lifts, and office fixtures—decrease in value. Depreciation allows you to claim this reduction in value as a tax deduction, improving your cash flow and reducing taxable income.
The ATO provides depreciation rates and guidelines under:
- Division 43 (Capital Works Allowance) for structural components.
- Division 40 (Plant and Equipment) for removable or mechanical assets.
How Commercial Property Depreciation Works
Depreciation reduces the taxable income generated by your commercial property. Unlike other deductible expenses, such as repairs or interest payments, depreciation is a non-cash deduction, meaning no out-of-pocket expenses are required.
Two Key Categories
- Division 40 (Plant and Equipment)
- Covers assets such as lighting systems, lifts, HVAC units, and office furniture.
- Each item has an ATO-defined effective life, which determines its depreciation rate.
- Division 43 (Capital Works Allowance)
- Includes structural components like walls, roofing, and flooring.
- Applicable to buildings constructed or significantly renovated after 1987, with deductions spanning up to 40 years.
Methods of Calculating Depreciation
Depreciation for commercial properties is calculated using two main methods:
Diminishing Value Method
- Provides higher deductions in the early years by applying the depreciation rate to the asset’s declining value.
- Ideal for investors seeking immediate tax relief.
Formula:
Base Value × (Days Held ÷ 365) × (200% ÷ Asset’s Effective Life)
Prime Cost Method
- Applies a steady depreciation rate to the asset’s original value, offering consistent deductions over its effective life.
- Best suited for those preferring stable, long-term benefits.
Formula:
Asset Cost × (Days Held ÷ 365) × (100% ÷ Asset’s Effective Life)
Method | Early-Year Deductions | Long-Term Deductions |
Diminishing Value | Higher | Decreases over time |
Prime Cost | Consistent | Consistent |
Case Study: Commercial Property Depreciation
Property Overview
- Type: Retail and office space
- Location: Sydney CBD
- Purchase Price: $5 million
- Construction Year: 2010
- Assets: HVAC systems, shopfront fittings, lighting systems, and elevators.
Depreciation Insights
A professional TDQS depreciation schedule revealed the following deductions:
- Division 43 (Capital Works Allowance)
- Structural elements, including walls, roofing, and flooring, were eligible for a 2.5% annual deduction.
- Total annual deduction: 2.5% of the structural value.
- Division 40 (Plant and Equipment)
- Assets such as HVAC systems, elevators, and lighting were assessed based on their effective lives.
- Total deduction: approximately 15% of the asset value in the first year.
Total Outcome
The investor claimed deductions equating to 5% of the property’s purchase price in the first year alone. Over five years, this amounted to tax savings of 25% of the property’s value, significantly improving the investment’s cash flow.
Steps to Maximise Commercial Property Depreciation
To claim all allowable deductions, TDQS provides ATO-compliant depreciation schedules tailored for commercial properties. Our process includes:
- Comprehensive Research
- Gathering all relevant details about your property’s construction and assets.
- On-Site or Virtual Inspection
- A qualified assessor identifies and documents all eligible components.
- Accurate Calculations
- Depreciation is calculated using both the Diminishing Value and Prime Cost methods for optimal results.
- Recover Missed Deductions
- Identify eligible deductions from previous financial years to boost returns.
- Customised Reports
- Our detailed schedules simplify claims, whether for sole or joint property ownership.
Getting Started is Easy
- Request a Quote
- Schedule an Inspection
- Receive Your Comprehensive Report
Why Choose TDQS for Commercial Property Depreciation?
TDQS offers unmatched expertise and tailored solutions for commercial property investors:
- Maximised Deductions: We ensure you claim every eligible allowance.
- Non-Cash Benefit: Gain significant tax relief without extra spending.
- Customised Schedules: Designed for both new and established properties.
- Accountant-Friendly Reports: Detailed schedules simplify annual tax reporting.
When Should You Order a Depreciation Schedule?
To optimise your tax savings, order a depreciation schedule as soon as your property is leased. Even for properties purchased late in the financial year, having a schedule ready before 30 June enables partial claims.
Missed deductions? It’s not too late. The ATO allows adjustments for up to two years (or four years for trusts), enabling investors to recover missed depreciation and potentially receive refunds.
FAQs
- How Long Can I Claim Depreciation?
Depreciation for commercial properties typically spans up to 40 years. - What Does a Depreciation Schedule Cost?
Fees for commercial properties start at $1,000, and all costs are 100% tax-deductible. - Is an Inspection Necessary?
For complex or specialised properties, an on-site inspection is often recommended. Virtual inspections may suffice for simpler properties. - How Much Can I Save?
Savings vary based on the property type and value. Contact TDQS for a personalised estimate.
