May 20, 2025
Introduction to investment in Hotel Depreciation is a powerful yet underutilised tax tool in hotel investments. While many hotel owners recognise the value of depreciation for tax reduction and cash flow improvement, they often fail to capitalise on the full spectrum of opportunities available. This is particularly true in the hospitality industry, where high-value assets, frequent refurbishments, and complex ownership structures make depreciation planning both critical and complicated.
For hotels, depreciation isn’t just about buildings—it’s about every asset that contributes to operations, from furniture and fittings to lifts and air conditioning systems. Given the dynamic nature of hospitality operations, a proactive approach to managing and maximising depreciation benefits can translate into substantial long-term financial gains.
The Limitations of a One-Off hotel Depreciation Schedule A common mistake among hotel owners is relying on a one-time depreciation schedule prepared by a quantity surveyor (QS) at the time of purchase or initial construction. While this schedule serves as a solid foundation, it’s often viewed as a “set and forget” document that lasts for decades. Unfortunately, this passive approach causes hotel owners to miss out on significant depreciation opportunities over time.
One-off schedules typically do not account for ongoing changes to the asset base, such as new purchases, renovations, or asset disposals. For example, when a hotel upgrades its rooms with new TVs or replaces outdated lobby furniture, those new expenditures may never be captured for depreciation if the schedule is not updated accordingly. Likewise, when old assets are removed, failing to claim scrapping allowances results in a lost deduction that could have improved cash flow.
The Power of an Updated Asset Register To maximise depreciation, maintaining a current and detailed asset register is non-negotiable. An asset register is a comprehensive inventory of all depreciable assets within your hotel, categorised by type, location, date of acquisition, and value. When maintained diligently, it becomes the cornerstone of an optimised depreciation strategy.
A live asset register allows you to:
- Track the lifecycle of each asset and claim depreciation accordingly.
- Identify scrapped or obsolete assets during renovations for immediate write-offs.
- Ensure all capital improvements and new acquisitions are captured and claimed.
- Allocate assets accurately across different entities if your investment is structured in a dual-entity model.
Unlocking Scrapping Allowances During Renovations One of the most overlooked opportunities in hotel depreciation planning is the ability to claim scrapping allowances during renovations. When you remove old or obsolete assets—such as carpets, light fittings, furniture, or air-conditioning units—you’re entitled to write off their remaining depreciable value. This is known as a “scrapping allowance” and can provide immediate tax relief.
Many hotel owners focus solely on the cost of new installations and forget that the assets being removed still hold residual value in their depreciation schedules. If these assets are not correctly identified and scrapped, the unclaimed value simply disappears from the books—resulting in a lost opportunity to reduce taxable income.
Capturing Depreciation on All Capital Expenditures Another common area where hotel investors lose out is failing to claim depreciation on all forms of capital expenditure. While structural improvements and major renovations are usually captured, many owners neglect to account for smaller—but still deductible—expenses that add up over time.
Examples of often-missed items include:
- Security systems
- Outdoor signage
- Kitchen equipment
- Landscaping improvements
- Artwork and decorative items
- Technology and software systems
Structuring Your Hotel Investment: Two Entity Model Many sophisticated hotel investors structure their ownership across two separate legal entities: one for the property (land and buildings) and another for the business operations (the hotel management and services). This structure offers various financial, tax, and asset protection advantages—but it also introduces complexity in hotel depreciation planning.
Under this two-entity model:
- The property-owning entity claims depreciation on the building structure and fixed assets.
- The operating company claims depreciation on plant and equipment used in day-to-day operations.
Splitting Assets According to the Contract of Sale One of the most critical—but often neglected—steps in hotel acquisition is correctly splitting assets in accordance with the contract of sale. This allocation determines how hotel depreciation can be applied across different asset categories and entities, especially if you're operating under a dual-entity structure.
The contract of sale should explicitly outline:
- Land value (non-depreciable)
- Building value (capital works deductions)
- Plant and equipment (based on effective lives of the assets)
Establishing Correct Opening Values Once assets have been split from the contract of sale, the next step is establishing accurate opening values. These figures represent the base value of each depreciable asset at the time of acquisition or commencement of business activity and are critical for calculating correct depreciation.
Incorrect or outdated opening values can have long-term tax implications. If the value of assets is overestimated, you risk claiming excessive deductions that may trigger ATO attention. If underestimated, you’ll miss out on potential tax savings.
How to Implement an Effective Depreciation Strategy Maximising depreciation benefits isn’t just about ticking boxes—it’s about implementing a consistent and proactive strategy. A successful approach requires close collaboration between quantity surveyors, accountants, and hotel management teams.
Here’s how to put an effective strategy into motion:
- Initial Assessment
- Asset Register Management
- Annual Review and Audit
- Strategic Planning Before Renovations
- Utilise Software Tools
Case Study: Before and After an Optimised Depreciation Strategy To illustrate the value of proactive depreciation management, consider this real-world case study of a mid-sized hotel with 85 rooms, located in a regional city. Before optimisation, the owner used an outdated QS schedule and missed scrapping and acquisition deductions. After re-engaging a QS and restructuring their approach, the owner was able to unlock over $280,000 in additional depreciation across two years.
The ATO’s View: Staying Compliant While Maximising Deductions While the ATO encourages investors to claim all entitlements, it also expects accurate and substantiated claims. Hotel owners must walk the line between maximising deductions and remaining compliant. Red flags for the ATO include overinflated values, double-dipping claims, and poor documentation.
Working with the Right Professionals Depreciation is best managed with a collaborative team:
- Quantity Surveyor
- Accountant with property expertise
- Hotel Operations Manager
- Legal Advisor
Conclusion: Proactive Depreciation is Smart Investing From asset registers to scrapping allowances, proactive depreciation management is not just smart—it's profitable. Updating your strategy regularly and aligning it with your hotel’s financial activities can unlock significant cash flow improvements and ensure long-term tax efficiency.
FAQs
- How often should I update my hotel’s depreciation schedule?
Ideally, you should update your depreciation schedule annually or whenever major capital improvements or renovations occur. Regular updates ensure that all new assets are captured and obsolete ones are scrapped for tax purposes. - Can I go back and claim missed depreciation from previous years?
Yes, the ATO allows retrospective claims for missed depreciation, typically going back up to two years for individuals and four years for companies or trusts. Consult your accountant to identify opportunities and amend past returns if needed. - How do I know if my asset register is complete?
A complete asset register should include all items purchased for the hotel, their acquisition cost, purchase date, location, and classification. If assets are missing, duplicated, or not clearly categorised, it’s time for a detailed review with a QS. - What qualifies as a scrapped asset?
Any depreciable asset that is permanently removed, disposed of, or destroyed during renovations can be scrapped. This includes furniture, fixtures, equipment, and even building components, provided their remaining value hasn’t already been claimed.
