Unlocking Wealth: The Benefits of Investing in Commercial Property with Tax Depreciation

High Rental Yields

One of the most attractive features of commercial property investment is the potential for consistently high rental yields. Unlike residential properties, where yields can be modest and affected by seasonal changes or short leases, commercial properties often deliver returns in the range of 5%–8% annually, depending on the location and tenant type.

Here’s why yields are often superior:

• Businesses commit to longer leases, ensuring steady rental income over several years.
• Annual rental increases are often built into lease agreements, indexed to CPI or fixed percentages.
• Lower vacancy turnover means fewer gaps in income and reduced marketing costs.

This combination of factors provides a more predictable and often more lucrative income stream than many other asset classes. When coupled with tax depreciation benefits, the effective after-tax yield can be significantly enhanced, making commercial properties a strategic component in any investor’s portfolio.

Long-Term Capital Growth

Commercial property is often prized not only for its strong income stream but also for its potential to appreciate over time. Long-term capital growth is driven by several key factors:

• Strategic location improvements such as infrastructure projects or rezoning.
• Tenant quality and stability, which can increase the property’s market value.
• Supply and demand dynamics in commercial real estate sectors like industrial or medical.

Many commercial properties come with fixed, long-term lease agreements, which not only secure income but also add intrinsic value. A property with a reputable tenant under a multi-year lease will typically command a higher sale price, making capital gains more achievable at the time of exit or refinancing.

Diversification for Portfolio Stability

One of the golden rules in investing is diversification, and commercial property offers a reliable avenue for it. Adding commercial assets to a portfolio primarily made up of residential property or equities can balance risk and improve overall portfolio resilience.

Commercial property values often respond differently to market pressures than other asset classes. For instance:

• Industrial assets may perform strongly during e-commerce booms.
• Medical or childcare facilities tend to be recession-resilient.
• Retail properties in strategic, high-traffic areas may retain value despite economic fluctuations.

By investing across different commercial sectors, or by combining them with other types of assets, investors can better weather economic downturns. Furthermore, returns from commercial properties are less correlated with stock market movements, providing a layer of protection during financial volatility.

Tenant Responsibility for Outgoings

A distinct advantage of commercial property investment is that tenants often cover many of the property’s ongoing expenses, known as outgoings. These typically include:

• Council rates
• Building insurance
• Property management fees
• Repairs and maintenance
• Utilities specific to business operations

These costs, which are usually borne by landlords in residential properties, are transferred to the tenants in many commercial lease arrangements—particularly in net lease agreements.

This shift in responsibility significantly improves the net yield for investors. With fewer ongoing costs and a predictable income stream, commercial property allows investors to focus more on strategic asset management and less on day-to-day financial maintenance.

Enhanced Tax Efficiency

Beyond rental income and capital appreciation, one of the most underrated advantages of commercial property is its tax efficiency—particularly through tax depreciation.

Depreciation allows investors to claim deductions for the wear and tear on both the structure of the building and the internal assets. These deductions can significantly offset the income generated by the property, thus reducing taxable income and increasing after-tax cash flow.

There are two main categories of depreciation:

1. Division 40 – Plant and Equipment: Covers removable items like air conditioners, security systems, and commercial kitchen equipment.
2. Division 43 – Capital Works: Covers the structure of the building, such as walls, roofs, and permanent fixtures.

When used effectively, depreciation strategies can save thousands in taxes each year, making commercial property a highly efficient asset from a taxation perspective.

Understanding Tax Depreciation

Tax depreciation is the process of claiming deductions for the decline in value of an income-producing property and its assets over time. The Australian Taxation Office (ATO) allows commercial property owners and tenants to offset the natural wear and tear of buildings and fixtures as a non-cash tax deduction.

These deductions are especially valuable because they reduce taxable income without requiring any outlay of cash, directly improving an investor’s cash flow and return on investment. Depreciation can be claimed on two primary components:

• The building structure (Capital Works under Division 43)
• The fixtures and fittings (Plant and Equipment under Division 40)

To ensure compliance and maximise deductions, property owners typically engage a qualified Quantity Surveyor to prepare a detailed depreciation schedule, which breaks down the assets and applies ATO-approved rates to each.

Division 40: Plant and Equipment Depreciation

Division 40 covers the depreciation of individual plant and equipment assets found within a commercial property. These are typically items that can be easily removed or replaced and are not considered part of the building’s permanent structure.

Examples include:

• Air conditioning systems
• Commercial kitchen appliances
• Lighting and security systems
• Lifts and escalators
• Office furniture and fit-outs

Each item is assigned an “effective life” by the ATO, which determines the annual depreciation rate. Investors can choose between two calculation methods:

1. Diminishing Value Method – Accelerated deductions in the early years
2. Prime Cost Method – Equal deductions over the asset’s useful life

By leveraging Division 40 appropriately, investors can front-load deductions in the initial years of ownership, thereby boosting early-stage cash flow and improving the short-term profitability of the investment.

Division 43: Capital Works Deductions

Division 43, also known as Capital Works, allows property owners to claim deductions for the structural elements of a commercial property. These components are considered part of the building and are generally fixed or permanent in nature.

Examples of Capital Works assets include:

• Walls and flooring
• Roofing and windows
• Concrete slabs
• Fixed cabinetry and joinery
• Built-in bathrooms or kitchen fittings

Capital Works deductions are calculated at a flat rate of 2.5% per annum over 40 years from the date the construction was completed, provided the construction commenced after 16 September 1987. This means that owners of newer commercial buildings, or those who undertake substantial renovations, can claim significant deductions over several decades.

It’s important to note that these deductions are only available for construction and improvements that are properly documented and costed, which is why a professional depreciation schedule is critical for compliance and maximisation.

Scrapping and Immediate Deductions

One often-overlooked benefit of owning a commercial property is the ability to claim scrapping deductions when assets are removed or replaced during renovations or upgrades.

Here’s how it works:

• If an asset has remaining depreciable value and is removed (scrapped), the owner can claim the remaining unclaimed value as a full deduction in the year the item is scrapped.
• This can apply to outdated fixtures, fittings, or even entire fit-outs that are removed to modernise or rebrand a commercial space.

For example, if a retail investor renovates a storefront and removes old lighting and air conditioning units, they may be entitled to an immediate deduction on the residual value of those scrapped items.

Scrapping significantly enhances the return on capital improvements and is an excellent strategy for boosting cash flow in renovation years—but only when accurately assessed and documented by a Quantity Surveyor.

How Tax Depreciation Boosts ROI

One of the most powerful financial levers in commercial property investment is tax depreciation’s impact on return on investment (ROI). While depreciation doesn’t involve a cash outlay, it provides real tax savings that directly improve an investor’s after-tax income.

Consider this simplified example:

• Property Purchase Price: $1,000,000
• Annual Net Rental Income: $60,000 (6% yield)
• Annual Depreciation Deduction: $15,000
• Company Tax Rate: 30%

Without depreciation, the taxable income is $60,000, leading to a tax bill of $18,000. With $15,000 in depreciation deductions, the taxable income reduces to $45,000, lowering the tax to $13,500. This results in $4,500 in tax savings, effectively increasing the after-tax income to $50,500 and pushing the effective after-tax yield to 6.45%.

Over time, this can significantly compound wealth, especially when reinvested. Depreciation thus acts as a silent partner in boosting cash flow and making each investment dollar work harder.

Who Can Claim Commercial Property Depreciation?

Both landlords (property owners) and tenants (lessees) can claim tax depreciation on commercial properties, though the scope of deductions differs based on who owns the depreciable assets:

• Landlords:
  • Can claim depreciation on both Division 40 plant and equipment (if owned) and Division 43 capital works.
  • Applies to new builds, refurbishments, and structural upgrades.
• Tenants (Lessees):
  • Can claim depreciation on fit-outs and improvements they install.
  • If a tenant fits out an office with custom furniture, lighting, or internal walls, they may be eligible for substantial deductions.

Importantly, these claims must be supported by a professional depreciation schedule and should align with the specific lease agreement terms. For both parties, this creates an opportunity to reduce tax liabilities while maintaining the functional and visual appeal of the property.

Case Study – Industrial Warehouse Investment

One of TDQS’s clients, ABC, invested in a $1.5 million industrial warehouse in a growing logistics hub. The property featured:

• High-bay roller doors
• Partitioned office space
• Staff amenities
• Ample parking and loading zones

After acquiring the property, ABC engaged TDQS to prepare a comprehensive depreciation schedule. The result was a breakdown that included:

• Capital works deductions for structural components like concrete flooring, metal roofing, and partition walls
• Plant and equipment depreciation for lighting systems, office air conditioning, security installations, and plumbing fixtures

In the first year alone, ABC claimed over $45,000 in depreciation deductions, significantly reducing his taxable income. This improved his cash flow and net returns, making the warehouse a high-performing investment from day one.

Case Study – Hotel Renovation and Scrapping

Another client, Ethan, acquired a regional hotel leasehold and undertook a major renovation to revitalise the property. The project involved:

• Removing an outdated fit-out
• Installing a new commercial kitchen
• Upgrading all guest rooms and common areas
• Modernising lighting, HVAC systems, and finishes

By working with TDQS, Ethan was able to claim deductions in two key areas:

1. Scrapping deductions: The residual value of the removed fit-out was claimed immediately.
2. New depreciation: The newly installed assets were added to the depreciation schedule and depreciated as per Division 40 and Division 43 guidelines.

The total deductions for the first year—including scrapping—amounted to $836,026, a substantial tax saving that significantly improved his after-tax returns. This case illustrates how strategic renovations paired with depreciation planning can dramatically improve the financial outcomes of a commercial investment.

Crafting a Commercial Depreciation Strategy

Maximising returns on a commercial property isn’t just about buying the right asset—it’s also about strategically managing tax obligations, and that starts with a well-structured depreciation strategy. Effective planning involves:

• Understanding the types of deductions available (Division 40, Division 43, scrapping)
• Timing capital improvements to align with optimal tax periods
• Scheduling renovations in a way that leverages maximum deductions
• Utilising professional guidance to capture every eligible item

A proactive depreciation strategy can reduce taxable income annually while preserving more cash for reinvestment, property improvements, or debt reduction. The earlier it is implemented—preferably during or just after acquisition—the more value it delivers over the life of the investment.

Importance of a Quantity Surveyor

Engaging a qualified Quantity Surveyor (QS) is essential when it comes to commercial property depreciation. These professionals are uniquely equipped to:

• Assess the property and its assets in detail
• Allocate accurate values to all depreciable components
• Prepare ATO-compliant depreciation schedules
• Identify scrapping opportunities during renovations or upgrades

The Australian Tax Office recognises Quantity Surveyors as the only professionals, aside from construction professionals, legally qualified to estimate building costs for depreciation purposes. Without a QS-prepared schedule, many property owners risk missing out on thousands of dollars in deductions each year.

TDQS brings over 40 years of commercial property depreciation expertise, ensuring clients receive precise, comprehensive, and compliant reports that maximise financial outcomes.

Creating a Depreciation Schedule

A commercial depreciation schedule is the foundation of any successful tax depreciation claim. It provides a detailed breakdown of all depreciable assets within a property, separating them into:

• Division 40 (Plant and Equipment)
• Division 43 (Capital Works)

A professionally prepared schedule from TDQS typically includes:

• Asset lists with effective life estimates
• Year-by-year deduction projections
• Allocation of costs between owners and tenants (where applicable)
• Deductions adjusted for the time of year the property was acquired

This schedule is a one-time investment that can be used for up to 40 years, depending on the property’s age and condition. It ensures all eligible deductions are accurately recorded and helps investors plan their tax obligations and cash flow years in advance.

Timing and Lodgement

Timing is critical when it comes to maximising depreciation deductions. Investors should ideally obtain a depreciation schedule:

• Immediately after purchase to start claiming from day one
• Before or during renovations to ensure scrapping deductions are properly captured
• At the beginning of a financial year to forecast deductions accurately

Depreciation claims are made annually as part of your tax return lodgement. If you’ve missed past claims, it may be possible to amend previous returns—a process that can result in recovered refunds for several prior years.

Working with TDQS ensures that your depreciation reports are delivered on time and fully compliant, helping you meet deadlines and avoid leaving money on the table.

Strategic Investment Tips

Investing in commercial property requires more than just capital—it demands strategy, research, and expert guidance. Here are key tips to ensure your investment works hard for you:

1. Conduct Thorough Market Research
   Evaluate the property's location, tenant demographics, nearby amenities, economic indicators, and future infrastructure developments. A well-informed purchase sets the foundation for long-term success.
2. Build a Professional Team
   Engage qualified professionals such as:
   • Commercial real estate agents
   • Accountants with property expertise
   • Quantity surveyors for depreciation schedules
   • Legal advisors for lease agreements and due diligence
3. Understand the Lease Structure
   Know whether the lease is net, gross, or hybrid—this determines who pays what. Leases with tenant-paid outgoings can significantly improve your net return.
4. Plan for Market Fluctuations
   Set aside contingency reserves to manage vacancies or unexpected maintenance. Diversifying across property types and regions can also help smooth out risks.
5. Define Your Investment Goals and Exit Strategy
   Are you focused on cash flow or capital growth? Do you plan to hold long-term or flip after a renovation? Clear objectives will guide better decisions throughout the investment lifecycle.

Why Choose TDQS for Your Depreciation Needs

When it comes to maximising your investment in commercial property, experience and expertise matter. TDQS brings over 40 years of specialised knowledge in commercial property depreciation, offering unmatched accuracy and value.

Here’s why investors choose TDQS:

• Tailored Depreciation Schedules: Every report is custom-made to reflect your property’s unique features, assets, and ownership structure.
• ATO-Compliant Reports: Built to meet current tax standards, minimising audit risks and ensuring full compliance.
• Responsive Client Support: Our team is committed to guiding you through the process with clarity and precision.
• Proven Track Record: Trusted by thousands of property investors, from warehouse owners to healthcare operators.

TDQS doesn’t just prepare reports—we help you uncover hidden value, improve cash flow, and make smarter investment decisions.

Conclusion

Investing in commercial property offers a compelling pathway to long-term financial success. With higher rental yields, durable lease structures, and the added advantage of tenants covering outgoings, commercial real estate presents both income and capital growth opportunities.

Yet one of the most powerful tools in this journey is often overlooked: tax depreciation. When correctly applied, it can significantly reduce taxable income, increase cash flow, and enhance the after-tax yield of your investment.

With TDQS by your side, you’ll benefit from four decades of expertise in commercial depreciation, ensuring every possible deduction is captured. Whether you’re acquiring a warehouse, renovating a retail space, or leasing a medical facility, our team will deliver the precision, compliance, and strategy your investment deserves.

Ready to unlock your property’s full potential? Contact TDQS today at 1300 922 220 or visit our website to learn how we can help you maximise your commercial returns.

FAQs

1. What’s the difference between Division 40 and Division 43?
   Division 40 covers plant and equipment assets such as air conditioners and security systems, while Division 43 applies to structural elements like walls and roofing. Both allow property owners to claim depreciation, but the methods and timelines differ.
2. Can I claim depreciation on an older commercial property?
   Yes, even older properties may be eligible for Division 40 (if assets were added after 1999) or Division 43 deductions (if constructed after 1987). A quantity surveyor can assess eligibility and provide a tailored schedule.
3. How often should I update my depreciation schedule?
   Typically, a depreciation schedule is valid for up to 40 years. However, you should update it whenever you make substantial renovations or add new assets to ensure all deductions are captured.
4. Do I need a quantity surveyor to claim depreciation?
   Yes. The ATO recognises qualified quantity surveyors as the appropriate professionals to estimate construction costs and prepare compliant schedules, especially when historical construction costs are unavailable.

5. Are depreciation claims audited by the ATO?
While not all claims are audited, your depreciation schedule must be ATO-compliant. Engaging a reputable firm like TDQS ensures accuracy, compliance, and peace of mind in the event of a review.