Starting a new business can be quite overwhelming, particularly if you’re trying to do it on a strict budget. 

In addition to other initial start-up costs such as purchasing stock or merchandise, arranging insurance, budgeting for staff overheads and (if you don’t own the building) allocating funds to pay rent, there are often costs involved in installing assets to fit-out the new space before you can open the doors for business.

What commercial property tenants are often unaware of is that they are entitled to claim deductions in the form of depreciation for many of the assets installed during the fit-out of a commercial property. 

This is hugely important for commercial tenants as depreciation is a valuable source of hidden cash flow that can not only lessen the burden of fit-out costs but also assist with ongoing business expenses. 

What is depreciation?

As a building gets older and the items within it age, they depreciate in value. The Australian Taxation Office (ATO) allows commercial building owners and tenants to claim deductions for the wear and tear of the structural and fixed items within a property as well as for the easily removable plant and equipment items contained within the property.

Depending on the construction commencement date, the type of commercial property and its use, capital works deductions should be claimed at a rate of either 2.5 per cent or 4 per cent by the owner each year for any structural or fixed items contained within the property.

Owners and tenants: Who claims what? 

When depreciation is being applied to removable plant and equipment items within a property it becomes far more complicated. This is because both the owner and the tenant of the property can claim deductions for the depreciation of items.

Commercial tenants are able to claim depreciation for any fit-out they add to a property once their lease starts. Examples of common business assets installed during a fit-out include carpets, air-conditioning units, fire fighting equipment, desks, blinds, shelving and security systems.  

The owner can also simultaneously claim deductions for any plant and equipment items originally contained within the property.

Each plant and equipment item should be depreciated based on its individual effective life as set by the ATO.  However some assets will also entitle the owner to claim an immediate write-off or to add them to a low-value pool to increase deductions sooner if they meet certain requirements as outlined by the ATO.

Depending on lease conditions, if a tenant vacates a building and does not remove the fit-out from the building, the owner of the property may still be able to claim any remaining depreciation for these items. However, if a tenant’s lease stipulates that the property must be returned to its original condition at the end of the lease, the tenant can benefit by claiming any remaining depreciation on the items which are removed and scrapped from the property. This is known as “scrapping”.

Arrange a tax depreciation schedule to maximise deductions

To ensure that depreciation deductions are maximised for both owners and tenants, it is recommended that both parties contact a specialist Quantity Surveyor to arrange a tax depreciation schedule. A Quantity Surveyor can provide two separate schedules for the owner and the tenant which outline the deductions available for each party. 

These deductions can be beneficial to both the tenants and the owner of the property in improving their cash flow and in reducing the annual costs of renting or holding the property.

Current considerations

It was proposed in the 9th of May 2017 federal budget that concessions introduced during the May 2015 federal budget - which allowed small businesses with an aggregated turnover of less than $2 million to claim an instant asset write-off - would be extended to include those enterprises who met the new turnover threshold of less than $10 million. 

While these concessions were originally planned to end on the 30th of June 2017, the government has proposed that these changes will be extended by an additional year as part of the 9th of May 2017 federal budget.

Essentially this means more businesses will be entitled to deduct plant and equipment assets with a value of less than $20,000 immediately and for a longer period than initially planned.

Read more from BMT Tax Depreciation:

BMT’s top ten tips for tax time

Depreciation is a cash cow for farmers

The deductions property investors often throw away