One of the least understood aspects of commercial property investment is the tax depreciation benefits available to investors. We invited Tyron Hyde from Washington Brown to discuss this seemingly complex area of investment:
As an investor, it is important to understand the tax depreciation allowances that are available to you. In my experience as a tax depreciation adviser, I have noticed that far more people choose to invest in residential properties opposed to commercial properties. This is one of the reasons why more people choose to invest in residential properties; because it is more common. They have a better knowledge and understanding of the process. So, while it should not be any more daunting than investing in a residential property, if you are thinking of investing in a commercial property it is important you understand there are major differences between the two.
There are various types of investment options out there, including commercial offices, retail spaces (such as shops) and even industrial factories.
It is important to note that commercial properties used for running a business (generally why people purchase a commercial property) are subject to capital gains tax. This is why it is imperative, according to the Australian Tax Office, that you have all of your records and documents of the dates and costs of obtaining the premises. So that when the time comes, you can calculate your capital gain, or possibly capital loss when you decide to sell the property.
If I occupy the property can I still claim tax depreciation?
In short, yes. When it comes to commercial properties, many people purchase the property in their own name or the name of their self-managed super fund. They then lease the property back to the business they own, enabling the individual tax payer or super fund to claim the tax depreciation allowance. This allowance can be significant on commercial properties. You can spend as much time in the office as you like and the ATO will not consider it your principal place of residence, and thus you can claim depreciation!
Thinking about purchasing a commercial property through your superfund?
In 2008, the Australian laws were altered in regards to superannuation funds. From then, the legislation allowed a specific type of borrowing within superannuation, generally referred to as the ‘instalment gearing provisions’. This enabled people to borrow within their super funds in order to purchase investment assets, and in recent years, people are using this provision to purchase whole commercial investment properties.
While a lot of investors might not fancy this idea, here are a few examples that may sway your decision making:
- In Australia, the rent for properties in some areas has become astronomical. So add your residential property costs (be it renting or paying off a mortgage), and the costs of your business together, that equates to a lot of money! So, a current trend appears to be owners preferring to pay off the debt of an appreciating asset, rather than spend the same amount on rent to which you gain nothing. Thus, if you are planning to be in business for the next twenty years, wouldn’t you prefer to purchase the property now and pay off the debt, rather than rent the same premises for the next twenty years and have nothing to show for it at the end?
- Majority of business owners eventually accumulate assets within their super funds. For example, a business owner has $300,000 in his super and his business premises are worth $900,000. If he wished to purchase these premises and hold onto them until he retired, he could use the $300,000 in his super fund plus the bank debt of $600,000 from his super fund to buy the premises through his super fund.
- Under the current legislation, if you retire and sell your business premises (given that you are over the age of 60 and completely retired), the capital gain can be tax free. Please note this may not be the case if the property is owned by you or your business.
Do older commercial buildings still qualify for the building allowance?
Property depreciation is a somewhat cloudy area for property investors, especially to those who are new to the whole process. So, let's discuss some of the basics to provide you with a greater understanding. Building allowance is often referred to as the capital works allowance. The building allowance of a property, both commercial and residential, refers to the actual structure of the building. Some of the items covered under the building allowances include, concrete, bricks, roof and tiles. Deductions in this area are calculated on the construction costs, not the purchase price of the building.
So, the most important process in claiming the building allowance is the age of the building or the year of construction. For example, residential properties built before July 1985 are not eligible for this deduction.
However, in regards to commercial buildings qualifying for the building allowance, there are slightly different rules. The rules for claiming the building allowance on commercial properties are as follows:
- 20 July 1982 - 21/22 August 1984: 2.5%
- 21/22 August 1984 - 15/16 Sept 1987: 4%
- 15/16 Sept 1987 onwards: 2.5%
The upshot of all this is that accessing tax depreciation benefits on your commercial investments doesn’t need to be daunting at all. With a couple of the key benefits listed above, you can see how putting a little more effort upfront into a commercial property investment instead of residential property can help you to reap the rewards in the long term.
About the author:
Tyron Hyde has a Degree in Construction Economics (UTS) and is an Associate of the Australian Institute of Quantity Surveyors. He began his career at Washington Brown in 1993 as a wide-eyed intern looking for a break in the industry. Twenty years later, Washington Brown is recognised as one of Australia’s leading tax depreciation companies.
With his passion and knowledge of property depreciation, Tyron is a regular speaker at industry conferences and is often quoted in national media. He has also published numerous articles and books including his popular CLAIM IT! book.