Commercial and Residential Property

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.

Let’s now crunch some numbers, using the Washington Brown depreciation calculator.

 

 

 

 

 

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 Depreciation Quote Schedulethat 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.

commercial and residential property

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.

Both Fords were very pleased.

Finally, Some Clarity

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;

  1. 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.
  1. 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.Depreciation Quote Schedule

  1. The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
  1. 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.
  1. 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.

  1. 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.
  1. 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.
  1. 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.
  1. 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

Depreciation CalculatorIn 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:

 

  1. Claim the building allowance (where applicable) and
  2. 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.