If you’re looking to invest in real estate, commercial properties present plenty of opportunities. However, you need to consider the risks and market drivers. This commercial property investment guide will help you.
You must think about more than the property investment basics when investing in commercial real estate. There are many complex market issues at work, which means you take on more risk.
Understanding these issues will play a role in the success of your investment in real estate. Commercial properties come in all shapes and sizes, which you must account for. This commercial property guide will equip you with the tools you need to succeed.
The Market Drivers
Several drivers affect the state of the commercial real estate market. You must understand what these drivers are before you can invest successfully. They include the following:
The strength of the economy. A weak economy means there are fewer businesses available to lease your property. Keep an eye on the data. For example, transport sector growth indicates that an economy is getting stronger.
Infrastructural improvements influence businesses’ decisions. For example, the building of new roads usually results in an influx of companies to an area. Buy your commercial property with future developments in mind.
The Reserve Bank of Australia’s (RBA) interest rates have an effect. If interest rates are on the rise, you’ll find less success with your commercial property. The cost of money increases. This places your potential tenants under greater financial strain. Conversely, low interest rates lead to more demand.
Population growth in certain regions will affect your decisions in real estate. Commercial properties do well in areas with large populations. This is because the demand for services increases, which leads to an influx of businesses into the area.
You should also consider population demographics. For example, areas with a lot of retirees will have more need for medical services. However, areas with lots of children need more family-oriented services. Use population demographics to find out about the types of businesses that will express an interest in your property.
The Risks
There are also several risk factors to consider when you invest in commercial property. Here are some of the most important:
Commercial properties tend to stand vacant for longer than residential properties. You will have to handle the costs of the property during such periods. As a result, it’s usually best to tie commercial tenants to long-term leases.
New property construction always presents a risk to your investment. Your tenants may decide to explore their options, which could lead to vacancies. It’s the issue of supply and demand. The more supply, the harder it is to find tenants. You also won’t be able to charge your tenants as much when there are other options available.
Size is an issue. Large commercial plots cost a lot more to maintain, and are only suitable for certain types of business. Smaller plots may be cheaper, but they also have their limits. You must consider the local demand for services before deciding on the size of your commercial investment.
Infrastructural improvements in other areas represent risks for your established commercial properties. Your tenants may make the move to the new area, which means you lose out. As a general rule, try to invest in properties that are close to central business districts (CBDs).
The Lease
A poorly-constructed lease could lead to the failure of your commercial investment. These are the factors to consider when creating your leases:
Commercial leases can extend from three years up to 10. The longer the lease, the less risk of vacancy. However, a bad tenant on a long-term lease could cost you. Offer the option to renew if you’re confident in the tenant’s ability to make on-time payments.
Link your rent increases to the Consumer Price Index (CPI).
You may require council approval for some types of business. For example, chemical treatment plants need to have the correct documentation.
Insert a condition that compels the tenants to revert the property to its original condition upon leaving. This will make it easier for you to rent the property out again when you current tenant departs.
What Else Should You Consider?
Further to this, you need to arrange proper financing for your purchase. Many residential lenders can’t help you with commercial properties. As a result, you may have to locate a specialty lender. Furthermore, you may not be able to borrow more than 70% of the property’s value.
You’ll also deal with a commercial agent, rather than a real estate agent. These professionals specialise in attracting the right businesses to your property. They’ll also help you to create attractive deals for potential tenants.
The Final Word
As you can see, commercial investment is a complex subject. This commercial property guide will equip you with the tools you need to succeed.
The team at Washington Brown can also help you to claim depreciation on your commercial property. Contact us today to speak to a Quantity Surveyor.
You have a choice to make when investing in real estate. Commercial properties may be more difficult to manage than residential homes. However, there are plenty of reasons why you should invest in commercial property.
So, you’ve decided to invest in real estate. Commercial properties may not seem like the best choice. They come with more complications than residential properties. This means you need to know more than the property investment basics. However, many argue that the benefits of commercial property outweigh the complications.
When investing in real estate, commercial properties may offer more security. However, there are plenty of other reasons for why you should consider them as an option.
Reason #1 – Stronger Yields
What rental yield should you aim for? This is a question that plagues many property investment novices.
Residential properties tend to offer lower yields. According to CoreLogic RP Data, you’ll achieve an average yield of 3.6% on a city-based residential property.
You can expect to earn anywhere between 8% and 12% yield on a commercial property. As a result, commercial real estate will often generate more income than a residential property.
Reason #2 – A More Secure Income
People often focus on risk when discussing commercial property. In particular, they concentrate on the issue of attracting tenants. You need to consider the needs of people in the local area. How your property caters to businesses relevant to those needs is also a factor. If your property doesn’t fit the bill, you’ll find it difficult to attract commercial tenants.
However, many ignore income security. With a residential property, you may find that a tenant leaves after six months. This means you have to go through the process of filling the vacancy again.
By contrast, a commercial lease lasts between three and 10 years. This means your property generates more income for a longer period of time. As a result, you can feel more secure in your income, and as a result make other investment decisions with more confidence.
Reason #3 – Rate Payments
You’ll often take on the responsibility of paying various rates with a residential property. In addition to council and water rates, you may also have to cover body corporate fees.
This isn’t an issue with commercial real estate. Commercial tenants will handle the rate payments for you. As a result, you spend less on the property each month.
Reason #4 – The Tax Benefits
Though you’ll enjoy various tax benefits with residential real estate, commercial properties have even more to offer.
Beyond capital works depreciation, you can also claim depreciation on plant equipment. This includes depreciation for air conditioning units and light fixtures. You can even claim for things like the carpet.
That’s not all. Commercial properties also offer strong building allowances, which you can use to reduce the amount of tax that you pay.
Reason #5 – A Lower Initial Cost
Commercial properties often cost less than residential properties. This is despite the potential they have to generate higher yields. For example, you may spend $100,000 on a commercial car park. By contrast, a small residential apartment could cost as much as $500,000.
As a result, you need to raise less money to get on the commercial investment ladder. Let’s assume you can get a loan worth 80% of the property’s value. That means you only need $20,000 to place a deposit on the commercial car park. The apartment deposit would cost $100,000.
Reason #6 – Protection Against Inflation
Inflation can have a massive effect on your property investments. If inflation rises, tenants have less money. With a residential investment, this leads to higher vacancy rates. You’ll also struggle to raise rents because tenants can’t afford higher prices.
You’ll deal with similar struggles when investing in commercial real estate. However, commercial yields tend to outstrip inflation. As a result, you have more protection when inflation becomes an issue. Even if you can’t raise your rents, a commercial property should still generate an income.
Reason #7 – You Can Rent and Own
Let’s assume you’re a business owner. You may want to buy an office, but that won’t make any money for your company. However, leasing means that your money goes straight into the pocket of an investor. What can you do?
With commercial property, you can own the property you rent. You can make the purchase itself using a self-managed superannuation fund (SMSF). Your business then moves into the property, during which time it pays rent into the SMSF. As a result, you essentially pay yourself, rather than a landlord, for use of the property.
The Final Word
There are many reasons to invest in commercial property. However, you need a high level of expertise to make the most of your investment.
Washington Brown can help with any depreciation concerns you have. Contact us today to find out how our Quantity Surveyors can help you to get more out of your commercial property investment.
So how does commercial property really stack up against residential in relation to depreciation?
While we have covered the differences between the two, there are also some similarities.
For example, the higher the quality of the commercial property the higher the depreciation. And the taller the building in commercial property, the higher the depreciation allowance. This is the same for residential property. Also, similar to residential property, the newer the building, the higher the depreciation allowance will be.
Note, also, that you will get more depreciation on a commercial suite than a factory unit or industrial suit). This is because a factory unit does not have as much plant and equipment. It is nearly all made up of concrete and steel.
In short, if you are the tenant in a commercial property, and think now might be a good time to become the owner-occupier, don’t forget to claim those tax depreciation allowances available to you as a landlord.
Or if you’re an investor, don’t exclude commercial property as an option. The depreciation is still beneficial as yields can be higher.
Let me share with you two projects we’ve worked on across various sectors. Including commercial, hospitality, retail and office/warehouse to illustrate the depreciation benefits for different investors.
CASE STUDY: Lend Lease
When I started way back when, never in my wildest dreams did I think I would be preparing reports for a multi-national company like Lend Lease. But I’m proud to say, over the years we have prepared many reports for them. From multi-million dollar shopping centres in Victoria and New South Wales, to factories in Queensland, and retail warehouses in New Zealand. Lend Lease likes that we go the extra mile.
The key to preparing depreciation reports on these types of commercial and industrial properties lies in the research.
For example, Lend Lease purchased a 20,000 square metre shopping centre in Port Macquarie. The site had already undergone multiple upgrades over various years. One approach would have been to visit the site and make an estimation based upon any drawings we might have been provided with, inspect the site and discuss any changes that may have occurred with the building manager. But I always find that you need more than that.
With large projects such as a commercial shopping centre, you should always contact the council and sift through the endless archival documentation they have. This can sometimes take a whole day. There can literally be hundreds of files to sift through as each time a new tenant moves in and out, council generally has records of that move. Every time the previous building owner made changes to the building, council will have recorded the event. The advantage of going to council is that you ascertain when and what type of upgrades were completed. Sometimes the information even includes the estimated cost of the upgrades and plans of the work that occurred. This builds up a great case to go back to the client and say, “Look at all this extra stuff we discovered you can claim, and here’s how we can prove it.”Lend Lease liked that.
CASE STUDY: Ford Factory
When I first started preparing depreciation reports, I initially focused on residential investment property. Not because the reports are that different, we just hadn’t been engaged to prepare reports for commercial property. So when one of my mentors, the distinguished quantity surveyor Jim Ford, offered me the opportunity to work with him on the depreciation report of a Ford factory in Queensland, I jumped at the chance.
Off I flew to Jim’s office in Brisbane and started work on this project. I had never been to another quantity surveyors’ office before and I have to admit I was nervous.
I sunk my teeth in. The more I researched the part of the Tax Act relating to the manufacturing industry, the more areas I found where we could save our client money.
Remember, this was early on in the game. There were very few quantity surveyors specialising in this area. I discovered a little known part of the Tax Act that allowed this type of factory to claim building allowance at a rate of 4% per annum in comparison to the standard 2.5% per annum. You may think 1.5% doesn’t sound like a lot, but on a $10 million construction cost – that’s an extra $150,000 the client could write off every year.
Make Sure You Claim All Depreciation on Your Commercial Real Estate
If you’re thinking about buying commercial real estate in Melbourne, you need to prepare yourself. Many people fail to claim the commercial tax deductions in Australia that are due to them. This results in thousands of lost dollars.
You can claim for all sorts of things on your commercial real estate property. For example, you can claim deductions for the wear and tear of your fittings, furniture, and the structure itself. In fact, making the right deductions at the right time can affect cash flow. You can change a negatively geared property into one that enjoys a good cash flow.
So now you’re probably wondering how to maximise depreciation on your commercial investment property in Australia. Our guide will show you how.
Get the Ownership Structure Right
How you buy your commercial property is just as important as the type of property you buy. You need to have the right structure in place if you’re going to claim the maximum depreciation.
For example, you can increase your deductions if you buy the property using a trust. The same is true if you buy with your self-managed superannuation fund (SMSF). In both cases, you can split your deductions. You can make claims on the building as a standalone entity. Furthermore, you can also claim on any tenancy assets. However, you must operate a business in the property to do this.
Furthermore, you can claim for any capital works you undertake during your ownership. These can include extensions and many other general improvements. Finally, if you occupy the building as a business owner, you can also claim depreciation for any fixtures or fittings. Again, you must use these as part of your business operations.
Maintain Your Records
It should go without saying that it’s vital that you maintain accurate records if you want to claim commercial tax deductions in Australia. However, a remarkable number of people don’t do this.
Document every expenditure that relates to the building. These include both the immediate and ongoing costs. Furthermore, you should add day-to-day expenditure to the list. Keep anything that relates to a financial transaction involving your building. These records can help you to claim more.
Use a Quantity Surveyor
Every commercial property investor should employ the services of a quantity surveyor. These professionals can help you to create depreciation schedules. A good schedule ensures you can claim as much as possible on your property.
A quantity surveyor will carry out regular inspections of your property. These help to determine what deductions you can make each year. They’re ideal for long-term planning as well. A good depreciation schedule will lay out how to claim deductions for the next 40 years.
Furthermore, quantity surveyors understand how to maximise your depreciation based on your timeline. You may only intend to invest in the property for a short period of time. That’s okay. A good surveyor will take this into account, just like they would for a long-term investment.
It’s likely your surveyor will recommend the diminishing value method if you’re a short-term investor. This assumes the value of your assets depreciates most during their early years. As a result, you can claim for more depreciation in the short-term.
Long-term investors may prefer the prime cost method. This assumes uniform depreciation over the lifetime of your assets. As a result, you claim the same amount each year, rather than the bulk in the early years.
Which method works best for you will depend on the time commitment you make to your commercial real estate investment. A good quantity surveyor can talk you through the different timelines.
Take Advantage of the First Year
Your first year of ownership is vital. It’s when you will set up the structure through which you will manage your commercial property for the years that follow. Getting things wrong during the first year makes things more difficult than they need to be later on.
However, you also need to take depreciation into account from the moment you invest in the property. This is where your quantity surveyor can help again. You may be able to depreciate some of your assets faster with a commercial property than you would a residential one. Your surveyor will point this out to you. As a result, you can make more upfront savings using depreciation, which means you have more cash to use during that difficult first year.
The Final Word
Maximising your depreciation from a commercial property isn’t easy, but you can do it. Use the services of a reputable quantity surveyor and don’t put anything off.
Remember that you can make claims for depreciation from the moment you invest in the property. Don’t lose money because you were slow on the uptake.
On Friday 14th July, the Treasury Office released a draft bill regarding how depreciation deductions on a second-hand property can be claimed moving forward. They also invited interested parties to make submissions.
It’s complicated, to say the least, so I’ve tried to simplify this Bill and the key points. Here are my 9 Key Takeaways from the Legislation;
If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.
We suspected this would be the case and I believe the property industry can collectively breathe a sigh of relief.
The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.
This is interesting and I suspect a lot more people will start buying properties in company tax structures.
If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.
How? Well, in summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.
Here is an example of how this will work:
Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets.
As they were previously used, Peter can’t claim depreciation on those items.
Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.
Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.
SUMMARY OF THE PROPOSED CHANGES
In my view, the Draft Bill could’ve been a lot worse for both the property industry and the Quantity Surveying professions.
It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.
It may, however, create a two-tier property market in relation to New and Second-hand property.
You can see the ads now “Buy Brand New – We’ve Got The Depreciation Allowances”.
It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:
Claim the building allowance (where applicable) and
Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.
The Quantity Surveying industry, just like the property development industry just breathed a huge sigh of relief.
I believe this integrity measure could’ve been better addressed and will be making a submission accordingly.
But it wasn’t a bad ‘first run’ by the Government!
P.S. If you purchased an investment property prior to The Budget, and it’s been an investment property the whole time, you are not affected and you should get a depreciation schedule quote now.
They’re suave, they’re slick and above all, they’re convincing, with their sales pitch down pat. Who are they? Property spruikers.
Unfortunately in Australia’s largely unregulated property advisory market spruikers – masquerading as experts – can flourish and their unsuspecting victims stand to lose a lot of money.
How can you avoid being preyed upon? We’ve identified some of the telltale signs of a property scam so you know when to run in the other direction.
The (usually unsolicited) approach
This might come in the form of ‘special offer’ emails, cold calls from telemarketers or a letterbox drop. Or you might make the first contact yourself after seeing a seductive advertisement in a newspaper or magazine. Once they’ve got your contact details they’ll be persistent in their efforts to get you to sign up.
Buzz words
The spruiker will pull out all the clichés such as ‘offer of a lifetime’, ‘secrets’, ‘guaranteed growth’, ‘no money down’, ‘positively geared’, ‘get rich quick’ or ‘risk-free investment’. Many are unrealistic promises that a seasoned property investor can spot a mile away. But novice investors can be lured in.
Investment seminars
Not all seminars are put on by spruikers, but this is a common way to target victims. You’ll receive an invitation to a free seminar, at which you’ll listen to a long spiel and be dazzled by a fancy presentation complete with glossy brochures, positive news story clippings, and detailed graphs and tables. Often they’ll either try and make you sign up for another – much more expensive – seminar or will book an appointment to talk to you one-on-one.
A push for credibility
To earn your trust, the spruiker will be desperately trying to prove their credibility. They’ll have professional promotional materials, may associate themselves with reputable companies or charities, and will flaunt their own – whether genuine or not – success and wealth. They’ll try every trick in the book to get you to believe in them.
One-stop shop
This is the absolute giveaway sign that you’re dealing with a property spruiker. They’ll make it so easy by doing everything for you. They’ll provide you with a conveyancer, valuer, mortgage broker, an accountant and even a property manager. While this might sound perfect for novice investors, what they’re really doing is ensuring the deal gets done by taking control of everything. All of the supposed ‘independent’ professionals are part of the scam. They will have you signing on the dotted line before you can reconsider.
The finance structure
The purchase will require you to borrow against an existing property so you don’t get a valuation on what they know to be an overpriced home.
Urgent deadline
They’ll want you to sign on the dotted line as soon as possible, often under the guise of a ‘time sensitive’ opportunity. This is just designed to get the deal done before you have time to wise up and change your mind.
Rental guarantees
If you hear the term ‘rental guarantee’, alarm bells should be ringing. It might sound like a safeguard for an investor, but if a property is in demand by tenants why would you need the rent guaranteed? Chances are when the guarantee is up you’ll have long vacancy periods or significantly reduced rental rates. Or the guarantee will go by the wayside once the deal is done, as it won’t be worth the paper it’s printed on.
Promise of exclusivity
The person or company offering you this opportunity purports to be the only one with access to it. They’re choosing to offer it to you, for a limited time only. They’ll try to convince you that they’re the only people who can find you the right property. In reality you’d likely find a much better deal yourself.
A property is offered, rather than a strategy
The first thing a genuine, professional property adviser will do is find out about your individual circumstances before giving you options as to where and what to buy. They’ll consider your budget, goals, and whether you’re looking for a property that will give you capital growth or rental returns. A spruiker, on the other hand, will have a particular property they want you to buy from a stocklist. And unlike most real estate transactions, there will be no room for negotiation.
An emphasis on tax
The spiel about the opportunity will often focus on the tax breaks it provides. While this is certainly a benefit of investing it shouldn’t be the primary motivation for buying. The main reason to invest is to build wealth.
New homes
Often the opportunity will be for a house-and-land package, with the promise of a stamp duty saving and bigger tax breaks through depreciation. You’ll need to compare the cost of these new homes with established ones in the area to ensure you’re not overpaying. Although you most likely will be.
They’re marketing outside the local area
They’ll go interstate to spruik to investors, hoping buyers won’t be familiar with the location of the properties they’re selling. These homes will often be in outer suburbs and in low socio-economic areas that may not have great growth potential, despite promises that they’re the next big ‘hotspot’. Ask yourself: if the market is so strong, why wouldn’t the locals be buying?
If you’re approached by what you suspect is a spruiker, before giving out any personal information – and hard-earned money – ask lots of questions to find out who they really are and what their motivations are.
Are they formally qualified as an investment adviser and how and what are they being paid?
While the promise of a ‘get rich quick’ scheme can be tempting, it won’t live up to expectations. If it sounds to good to be true, it probably is!
Property is an excellent vehicle to build wealth. Make sure to keep in mind that it takes research and education to get it right. It won’t happen overnight. It takes time and patience to grow your nest egg.
The best way to invest is to do the homework yourself to find the right opportunities. You should have a team of trusted professionals, including a finance broker, solicitor and accountant, to give you independent advice.
Property Depreciation Rates – Timelines to Consider for Residential and Commercial Properties
Property investors ought to know that when it comes to claiming building allowance, there is a maximum amount to go for which is the full 4%. Building allowances, which are deductions that allow you to claim your investment property’s construction expenses against your taxable income, commonly range from 2.5% to 4%.
I have mentioned where you can get a 4% claim on building allowance with manufacturing buildings and short-term traveller accommodations. But where do we draw the line with residential and commercial properties?
Residential Properties
Do you own a house, unit, or townhouse? If the construction of this residential property commenced within July 18, 1985 to September 16, 1987, you are eligible for a 4% building allowance. Residential properties with dates of construction after this time period can only claim 2.5%. However, because the you can only claim a 4% building allowance for 25 years – if you buy a property today built in 1986, for instance, there is NO building allowance left. It ran out in 2011 (ie. 1986 + 25 years = 2011)
Property Depreciation Rates
Commercial Properties
Office buildings, serviced apartments, shops, and other non-residential properties for commercial and industrial use can also give you the full 4% on one condition. They have to be built within what we call a “window of opportunity”. This window refers to the time frame between August 21, 1984 to September 16, 1987 and it becomes an opportunity to claim 4% if your construction commencement date falls within this period. Anything outside that window can only give you 2.5% in building allowances with July 20, 1982 being the earliest date you can claim.
So these days it’s better to buy a property that falls in the 2.5% timeline – as your 4% building allowance may have been eaten up by now.
Hi. I’m Tyron Hyde from Washington Brown. When I first bought this property in the city two years ago, it looked like this. It was ugly, run-down, and in desperate need of some TLC. But the location, the heart of the city, is perfect. So I got a designer to create a new floor plan and hired a builder to carry out the work. It was a substantial fit-out including new paint, carpet, workstations, and partitions. We even installed a new kitchen and a reception area.
At the end of the project, the builder gave us a tax invoice for $200,000. Now, I’ve seen situations where owners take the fit out cost and multiply that by 2.5% per annum. That’s the rate of which you can claim general fit-out costs. Now if I deduct based upon our $200,000 fit-out, I’ll only be able to claim $5,000 as a tax depreciation claim. Instead, I asked the builder to break down the cost relative to the appropriate trade like carpets, air conditioning, workstations, etc. We did apportion part of the builder’s cost such as management fees, each of those trades. And guess what?
Our depreciation the first year alone was $35,000, not 5! That’s where knowing the construction costs and tax law together could make a world of difference. So there you have it! From this to this! Yes it was expensive but being able to claim $35,000 depreciation in one year alone was a significant boost.
Or get a quote for a depreciation schedule by click here
Can you claim depreciation on commercial property?
Hi. I’m Tyron Hyde from Washington Brown. When I first bought this property in the city two years ago, it looked like this. It was ugly, run-down, and in desperate need of some TLC. But the location, the heart of the city, is perfect. So I got a designer to create a new floor plan and hired a builder to carry out the work. It was a substantial fit-out including new paint, carpet, workstations, and partitions. We even installed a new kitchen and a reception area.
At the end of the project, the builder gave us a tax invoice for $200,000. Now, I’ve seen situations where owners take the fit out cost and multiply that by 2.5% per annum. That’s the rate of which you can claim general fit-out costs. Now if I deduct based upon our $200,000 fit-out, I’ll only be able to claim $5,000 as a tax depreciation claim. Instead, I asked the builder to break down the cost relative to the appropriate trade like carpets, air conditioning, workstations, etc. We did apportion part of the builder’s cost such as management fees, each of those trades. And guess what?
Our depreciation the first year alone was $35,000, not 5! That’s where knowing the construction costs and tax law together could make a world of difference. So there you have it! From this to this! Yes it was expensive but being able to claim $35,000 depreciation in one year alone was a significant boost.
THE BUILDING ALLOWANCE (sometimes referred to as the Capital Works Deduction) is a deduction that enables property investors to offset the hard construction costs of their investment property against their assessable income. Hard construction costs may include items such as concrete, brickwork, common property items that are not plant and equipment, and even excavation. This deduction is allowed under Division 43 of the Income Tax Assessment Act (ITAA) 1997, which sets out deductions for Building Allowance.
Now, what’s so good about claiming a 4% Building Allowance? Well, obviously, the higher the deduction, the less tax you have to pay. The Building Allowance is one of those “non-cash deductions”. This means you don’t have to fork out the cash to claim it, you already did when you purchased the property.
For example – if your building was built for $250,000 and the plant and equipment was $30,000 – this leaves a Division 43 claim of $220,000. At 2.5% annually this amounts to a $5500 deduction. At the 4% rate the claim is $8800 per year.
How do you claim the 4% Building Allowance on a property?
Option 1
Purchase a manufacturing building where the core activities qualify under Section 43-150 of the ITAA 1997.
Purchasing a building that qualifies under the industrial activities of s43-150 of the ITAA 1997 will qualify the industrial building for a 4% write off.
For instance, buildings involved in refining petroleum, milling timber, freezing primary products, printing, curing meat, canning or bottling, might qualify.
Other operations that qualify include buildings in which items are brought in or maintained in the condition in which they are sold. For instance, recently we were able to claim this allowance for a major car manufacturer on the property where its vehicles were serviced.
But not all industrial buildings qualify. More than likely, if you have purchased a single factory in a complex of 50 factory units, it’s unlikely your building will qualify.
Option 2
If you purchase several units that can be defined as “short-term traveller accommodation” you may be able to claim a 4 per cent building allowance.
ATO ID 2003/513 has provided clearer definition as to what can now be defined as short-term traveller’s accommodation. Unfortunately, it’s not good news for investors, as most serviced apartments fall back into the 2.5 per cent category. If your serviced apartment has a kitchen, you should be claiming 2.5 per cent not the 4 per cent building allowance – unless you own 10 in the same building.
Some investors expect to receive the 4 per cent building allowance because they own a holiday house and have it fully furnished. But this type of accommodation does not fit into the category.
The construction needs to have commenced after February 27, 1992 to be eligible. This type of investment generally has the highest depreciation claim as a proportion of the purchase price. This is in part to the higher building allowance but also because these types of investments have more plant and equipment in them. They generally have lifts, pools, and also are often fully furnished.
(UPDATE: Deductions for plant and equipment items may only apply to commercial properties, brand new properties, if you bought the property prior to May 9, 2017, or some other exceptions – Read about the Budget changes here).
But a high depreciation schedule does not necessarily make a good investment. Many people have been burnt in the past buying these types of investments based upon the available tax deductions.
Any downside?
Surely there must be some downside in claiming the 4% Building Allowance? Well there’s no such thing as a free lunch. There is one downside – any amount claimed under Division 43 will need to be factored in when calculating your capital gains tax liability. This rule applies generally to assets acquired after July 1, 1997. But under the principal of “a dollar today is a better than a dollar tomorrow”, coupled with the CGT relief allowed, it’s still worth the exercise, especially to higher income earners.
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Further to this, you need to arrange proper financing for your purchase. Many residential lenders can’t help you with commercial properties. As a result, you may have to locate a specialty lender. Furthermore, you may not be able to borrow more than 70% of the property’s value.
