Common Property Deductions for Commercial Strata-title Owners

AN ESSENTIAL PART of ensuring commercial property owners claim the maximum depreciation for their property is taking advantage of any common property deductions which may apply.

Owners of all types of commercial property owners are entitled to claim deductions for the wear and tear that occurs to the building and its fixtures. Depreciation deductions fall under two classifications:

  • Capital works deductions (division 43) for the building structure
  • Plant and equipment deductions (division 40) for the easily removable or mechanical fixtures and fittings found within the building

If a property such as an office suite, industrial unit, or warehouse in a multi-unit complex is purchased in a development controlled under a strata-title body (or a strata title scheme), additional depreciation deductions will apply.

This is because owners are entitled to claim a portion of the depreciation for structures and assets contained within the common, shared areas.

Australian Taxation Office Tax Ruling 2015/3 provides clarification as to how common property is treated for tax purposes including detailed definitions of the types of strata-title ownership, which are deemed eligible.

Common property areas and shared infrastructure in commercial buildings which may result in additional capital works deductions for owners who purchase a lot in a strata title building include:

Some examples of plant and equipment assets found in common areas of commercial properties which can be claimed as a depreciation deduction include:

It is important to note that owners can only claim common property deductions for their portion of interest in the structure and assets contained. This is determined by their individual unit entitlement as per the strata plan.

However, when claiming plant and equipment assets, the deductions can be quite substantial, particularly as depreciation rules (such as immediate write-off and low-value pooling) can be applied.

The following table provides examples of the deductions BMT Tax Depreciation found for the owners of two commercial property types purchased via a strata-title arrangement.

Bottom Line: Apart from engaging a Tax Depreciation specialist, investors considering purchasing a lot within a strata-titled commercial building should also seek professional advice from their Accountant and Solicitor.


The 11 Benefits of Investing in Commercial Properties 

INVESTING IN Commercial properties is not the same as investing in residential property. There is a completely different set of dynamics driving commercial properties, when compared to residential.

Here, we’ll discuss the 11 Benefits of Investing in Commercial Property – among them being those also related to Accounting issues.

1. Rental Returns

The rental return for owning a commercial property is generally better than residential property and is easier to achieve a neutral return.

For example, you can generally achieve a 6% Net annual return, whereas residential properties would only achieve a 2% to 3% Net Return – after deducting all the other costs such as council and water rates, repairs, land tax and so on.

2. Renting an Business location Vs owning one

If you have a business and you are leasing an office, you’d be better off by buying your factory or office through your Self-Managed Superannuation Fund (certain conditions do apply). Instead of paying rent to the landlord, you can effectively pay that rent back to yourself via your SMSF.

3. Taxation Benefits

Rent paid by your company is tax deductible at 30%; and when it goes into your SMSF it’s only taxed at 15%. Capital gains are only taxed at 10%.

4. Contribution Limits

Where there is a limit on how much you can contribute into your SMSF as your Super contribution, there is no limit on how much rent you can pay – as long as the rental price is within market rates.

5. Depreciation value

Commercial properties have much more generous depreciation rates than residential properties. This makes them extremely tax effective.

6. Tax-Free Return

If you want to earn $200,000 a year (completely tax free), just buy a commercial property that has $200,000 in depreciation. Effectively $200,000 of your received rental will become tax free.

7. Leveraging your Commercial properties

The ability to leverage your assets via the use of debt is an extremely effective strategy.

Example: You have $200,000 cash deposit and you could borrow $400,000 at an LVR of 67%. This means you can buy a commercial property at $600,000. You now have $600,000 working for you instead of $200,000.

Assume

  • capital growth is 5% pa;
  • rental return of 6%pa; and
  • an interest rate of 5%.

In very broad terms, the rental basically covers interest (neutrally geared in this example); and if you achieve capital growth of 5% ($30,000 pa), you are able to achieve a 15% return on your cash of $200,000. ($200,000/$30,000)

Caution: Some properties do not achieve any capital gain, including some residential properties. It’s all about your property selection.

8. Property Leasing Options

Tenants are generally businesses and they prefer to sign long-term leases such as 5+5 years. Meaning, it’s signed for 5 years with an option for another 5 years.

9. Commercial Property Leasing Terms

Most leases require the tenant to pay all outgoings; so the landlord receives a NET rental.

10. Percentage of Rental increase is tied to the Capital Growth

Many leases have clauses that gives the landlord an automatic rental increase of 4% pa (or CPI) whichever is the higher. This means the capital growth of the property is also tied to the rental increases.

11. Commercial Property Valuations are far more clinical

In the main, they are closely tied to the rent.

For example:

  • If the rents were $60,000 pa and the market was paying a 6% return on investment, it then simply values the property at $1m ($60,000 divided by 6%).
  • However, if demand for the property were strong and investors willing to accept a 5% pa return, the property value would be worth $1.2m ($60,000 divided by 5%).
  • If rents reduced to $50,000 pa and assuming a 6% return is expected, then the property would have reduced in value to $833,333 ($50,000 divided by 6%)
  • If rents fell to $50,000 and returns dropped to 5% pa, then the property value would increase to $1m ($50,000 divided by 5%).

Bottom Line: As you can see, Commercial property offers you a wide range of benefits. Plus, it is also far less emotional than residential property – which is mainly valued using comparable sales.

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

WARNING: Your Land Tax Objections for 2017

THIS IS A REMINDER to Review your Assessments and Object before the 60-Day Deadline expires very soon.

As you may well be aware, the State Revenue Office is currently issuing 2017 Land Tax assessments for Victorian landholdings owned as at midnight on 31 December 2016.

These land tax assessments are based on local council valuations as at 1 January 2016 and from our preliminary review of a number of assessments, site values have increased substantially between the 2014 and 2016 revaluation dates.   This has obviously led to significantly higher land tax assessments for landowners.

If you are wanting to object to these assessments, you must do so within 60 days of receipt of the assessment and generally, no extensions to this date are possible.

Each year, HWL Ebsworth prepare a number of objections to land tax assessments and also prepare applications to VCAT where the SRO disallows objections which are made.  We also have relationships with leading valuers who specialise in land tax objections.

Bottom Line: Please contact me if you would like some help with this process … to ensure your objection is prepared properly, with the best chances of success — as the potential savings across your property portfolio could be substantial.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.



6 Tips for Commercial Property Owners in 2017

AS WE ENTER February, many investors are now implementing their annual New Year’s resolutions.

Commercial property owners often think about the ways they can reduce the costs of owning their property and running their business. However, when they do so, the deductions they can claim via depreciation are not always top of their list.

Many commercial property owners still do not maximise the depreciation deductions available from their commercial property, so this is a very good reason why they should add requesting a tax depreciation schedule to their annual resolutions for next year.

Claiming depreciation from commercial properties can be quite complicated.. There are many factors to consider which can easily lead to incorrect claims being made and deductions not being maximised, particularly when property depreciation is involved.

To assist the owners of commercial investment properties, here are six tips on property depreciation to consider in the New Year:

1. Pre-1982 Commercial property is not too old to claim depreciation

Both new and older commercial properties will attract some depreciation deductions. It is a myth that older properties do not attract a claim.

Although the Australian Taxation Office (ATO) places restrictions on claiming capital works deductions (depreciation for the structural element of a property for example roofs, walls and floors) there are no date restrictions for claiming depreciating plant and equipment assets.

The ATO advises that the owner of any commercial property in which construction commenced after 20 of July 1982 can claim capital works deductions.

Depreciation deductions for plant and equipment assets are calculated based on the individual effective life for each item set by the ATO.

Deductions for plant and equipment are also dependent on each assets condition and quality. As these items are rarely the same age as the property, generally having been updated over time, there are often significant deductions available to the owner for plant and equipment depreciation claims.

2. Claim renovations done by a previous owner of the property

Any renovations completed to an investment property can also be claimed, even if they were completed by a previous owner. This includes items which may not be obvious. For example new plumbing, water-proofing or updated electrical wiring.

For capital improvements of a structural nature to qualify as capital works deductions, the renovation must have commenced within the qualifying dates set by the ATO.

Recently installed plant and equipment items are also likely to receive higher depreciation deductions due to the increased costs involved in purchasing and installing these assets as well as the condition the assets are likely to be in when a specialist Quantity Surveyor makes their assessment.

3. Both tenants & owners can claim depreciation for any fit-out

Commercial tenants are able to claim depreciation for any fit-out they add to a property once their lease commences. This includes items such as desks, blinds, shelving, carpets, vinyl, fire fighting equipment and security systems.

If lease conditions mandate a tenant return the property to its original condition, they may also be able to claim a write-off for any remaining depreciable value available on scrapped assets.

This 100% deduction must be done in the same year as the item is removed from the property.

Any assets a tenant leaves behind after the tenancy has ended can also be claimed by the commercial property owner. Deductions for fit-outs can become very complicated, so it is important to consult with an expert.

4. Don’t wait if you have only just purchased a property

Often commercial property owners will wait until the next financial year to claim depreciation deductions if they have only just purchased a property. However by doing so, they could miss out on valuable cash that can be particularly beneficial after outlaying substantial funds to secure the property.

Specialist Quantity Surveyors use legislative tools, for example immediate write-off and low-value pooling, to make partial year claims more beneficial to property owners.

It is worth consulting an expert to find out what claims are available. Commercial property owners can also claim the tax depreciation schedule fee straight back in the same financial year if they arrange the schedule before the 30th of June.

5. Previous years tax returns can be adjusted

If a commercial property investor has not been maximising their deductions and claiming depreciation, the previous two financial year’s tax returns can be amended. A tax depreciation schedule can provide the details of any deductions missed for a commercial property owners Accountant to make a claim.

6. Get an expert to assess the property and perform a site inspection

To ensure that the correct deductions are claimed, make sure to speak with a specialist.

Quantity Surveyors are one of the few professionals recognised with the appropriate qualifications to estimate the construction costs of a building for depreciation purposes.

They will inspect the property to make sure every plant and equipment asset is identified and that claims for fit-outs are correctly noted for both the building owner and the tenant’s claim.

These Depreciation schedules make the process easy for both the owners, tenants and their Accountants to claim the maximum deductions possible for each party.

Bottom Line: Commercial property owners can get a free tax depreciation estimate by using the BMT Tax Depreciation Calculator. The calculator is available for online or to download as an app by clicking here.


Why are Young Couples Flocking to Commercial Property?

IN HIS BOOK Rich Dad Poor Dad, Richard Kiyosaki tells us: “You must know the difference between an asset and liability, and buy assets.”

Because “assets put money in your pocket.” Whereas, liabilities continually take money out of your pocket.

On that basis, you quickly realise your family home is therefore considered a liability — rather than an asset, or an investment. [Read more…]

Using Your Self-Managed Super Fund for Investment Without SMSF Borrowing

SINCE THE Superannuation Industry Supervision Act was amended in 2007 to allow superannuation funds to borrow against property, Self-Managed Super Funds have become a popular vehicle for investing in property — in particular, for self-employed borrowers or those in transition to retirement phase.

However, the loan products associated with this type of lending can be onerous and restrictive and this makes this form of lending far from preferable for many borrowers. [Read more…]

Kick-start Your Business by Claiming Depreciation

starting-a-business

MOST PROPERTY investors also run their own business. And as such, you realise there are significant costs involved in starting any new venture.

There are expenses for equipment, stock, insurance, staff overheads and (if you don’t own the building) funds required to cover rent.

Whether you own or rent the building, there may also be costs involved in fitting out the new space to make it appropriate to open the doors for business. [Read more…]

How Will Trump’s Win Affect Commercial Property?

Trump and Commercial Property

WHILE THE WORLD may be stunned by Donald Trump’s win, you’ll most likely find things will not be nearly as bad as everyone thinks.

And that’s reflected in the huge rebound in the stock market — once investors began studying his policies in more depth.

How did Trump achieve the Win?

In many respects, the media is responsible for the outcome — because so much airplay was given to his outlandish rhetoric. [Read more…]

5 Ways to Maximise Your Borrowing Capacity

WITH BANKS having tightened up investment lending considerably, gaining access to money for active property investors has become increasingly difficult.

Here are several strategies to help you to get the greatest amount of borrowing capacity with your lenders.

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Generate Cash Flow for Your Commercial Property

CLAIMING DEPRECIATION is paramount for commercial property owners and yet research suggests around 80% of owners fail to maximise the deductions available and therefore miss out on thousands of dollars in tax benefits.

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Foreign Resident CGT Withholding Regime

ON 25 FEBRUARY 2016, Parliament passed a new foreign resident capital gains tax withholding regime.

The regime applies to contracts entered into on or after 1 July 2016; and is intended to assist the Commissioner of Taxation in the collection of the CGT payable by foreign residents.

Under the regime, a 10% non-final withholding tax will apply to foreign residents on the disposal of relevant taxable Australian property.

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