depreciation and income tax - commercial buildings

The Income Tax Assessment Act 1936 allows the owner of a building a deduction for depreciation in respect of "plant or articles" owned by the him/her and used by him/her during the year for the purpose of producing assessable income or installed ready for use. Depreciation is allowed for those assets which are plant or articles within the meaning of the act. In addition to the deduction for depreciation a special tax deduction known as the "investment allowance" is available where capital expenditure of more than 500 is incurred by a taxpayer in the acquisition or construction by him/her, on or after 1.1.76 of a new unit of eligible property.

Subject to a number of specific exclusions, an item will generally qualify for the investment allowance if the unit comes within plant or articles as used in the depreciation provisions. There are special provisions for accelerated depreciation for "tourist" buildings.


Generally, if the only function of an asset is to provide the setting or environment within which income producing activities are conducted, it will not qualify as plant. Buildings are the most likely the "setting" in which such operations are carried on. The Commissioner has laid down guidelines under which buildings may be regarded as plant and has taken the view that depreciation is allowed on buildings to the extent that they form integral parts of, or take on the nature of plant.
A structure may be treated as plant only if it goes far beyond merely housing the machinery and is completely integrated with it, supporting it and making its function possible (tax rulings #31 and #108). The current view is that buildings will not qualify as plant within s54 except as follows: EMPLOYEES' FACILITIES

The definition of plant has been extended to cover plumbing fixtures and fittings, including wall and floor tiling provided principally for the personal use of employees of the taxpayers business or for the care of the children of those employees. A special depreciation rate of 33.33% is available for depreciable plant used by a taxpayer principally for the purpose of providing clothing cupboards, first aid, rest room and recreational facilities or meals or facilities for meals, for those people included in the extended definition.


If a building does not qualify for depreciation under the general provisions above, Division 10D of the Act may apply. This Division allows income tax deductions for capital expenditure on the construction of new non residential buildings used for the purpose of producing assessable income. Capital expenditure on building extensions, alterations or improvements qualify on a similar basis. The costs of construction, which must have commenced after 19.07.82 can be written off as deductions over 40 years at a rate of 2.5% per annum. The allowance is calculated on the basis of capital costs of constructing, extending or altering a building as is attributable to that part of the building as:
Capital costs include preliminary expenses such as architects' fees, engineering fees and the cost of foundation excavations. However, capital expenditure on land that includes the cost of clearing does not qualify for a deduction. Expenditure on plant or articles that qualifies as depreciable property such as lifts and air conditioning plant are disregarded. Such property continues to be depreciable under the general depreciation provision.

It is arguable whether or not consultants' fees, feasibility studies form part of the capital costs or whether they are outgoings of a revenue nature incurred in gaining or producing assessable income and therefore, an allowable deduction.


Cost of building: 500 000
Assume 30% plant/equipment etc @ 9% pa depreciation:
0.3 * 0.09 * 500 000 =
13 500 per annum
70% building @ 2.5% pa depreciation:
0.7 * 0.025 * 500 000 =
8 750 pa
Therefore, the total annual depreciation: 22 250 pa
Tax saved @ 39c/$ * 22 250 = 8 67

Such tax savings provide benefits to that building owner over and above net rents and expected capital gains and therefore, sales and determinations of market value should be adjusted for any tax advantages which can be passed onto the purchaser. The rate of return of eligible buildings can show an increase of about 2-4% pa after tax benefits are taken into account.