Leveraging Depreciation to Save on Tax for Commercial Property

Depreciation is one of the most powerful tax tools available to commercial property investors in Australia. When used correctly, it can significantly reduce taxable income and improve cash flow. Many investors overlook it or misunderstand how it works. This guide explains how depreciation applies to commercial property and how to use it strategically.

What Is Depreciation in Commercial Property

Depreciation reflects the natural wear and tear of a building and its assets over time. The Australian Taxation Office allows property owners to claim this decline in value as a tax deduction.

In commercial property, depreciation generally falls into two categories:

• Capital works deductions
• Plant and equipment depreciation

Both can be claimed if the property is eligible and properly assessed.

Why Depreciation Matters for Commercial Investors

Commercial properties often have higher purchase prices and higher income. This makes depreciation even more valuable.

Key benefits include:

• Lower taxable income
• Improved after tax cash flow
• Better holding power during market cycles
• More predictable long term tax planning

Depreciation does not require a cash outlay. It is a paper deduction based on asset value.

Capital Works Deductions Explained

Capital works deductions relate to the building structure itself.

This includes:

• Walls
• Roofs
• Floors
• Fixed construction elements

For most commercial buildings constructed after 1985, you can claim a deduction at a set annual rate. The claim usually continues for up to forty years from construction.

If you buy an existing building, you may still be entitled to claim the remaining portion.

Plant and Equipment Depreciation

Plant and equipment covers removable or mechanical assets within the property.

Examples include:

• Air conditioning systems
• Lifts and escalators
• Security systems
• Fire safety equipment
• Lighting and electrical fittings

These assets depreciate faster than the building structure. This can result in higher deductions in the early years of ownership.

A professional depreciation schedule is essential to identify and value these items correctly.

The Role of a Quantity Surveyor

To maximise depreciation, most investors engage a qualified quantity surveyor.

They:

• Inspect the property
• Identify eligible assets
• Estimate construction costs if unknown
• Prepare an ATO compliant depreciation schedule

This schedule becomes the foundation for your annual tax claims. It is a one off cost that can deliver benefits for many years.

Depreciation and Cash Flow Strategy

Depreciation does not put cash directly into your bank account. Instead, it reduces the tax you pay.

This improves cash flow by:

• Lowering tax liabilities
• Increasing retained rental income
• Supporting loan repayments
• Strengthening serviceability for future purchases

For commercial investors, cash flow stability is critical. Depreciation supports this without increasing risk.

How Depreciation Works With Off the Plan Commercial Property

Off the plan commercial property can offer strong depreciation benefits.

Because the building is new:

• Construction costs are clear
• Assets are modern and high value
• Depreciation deductions are usually higher in early years

This can be attractive for investors seeking tax efficiency from day one.

Using Coposit in a Commercial Property Strategy

While Coposit is often associated with residential and first home buyers, structured instalment based purchase models can also play a role in broader property strategies.

By reducing the upfront capital required to secure a property, buyers can:

• Preserve cash for tax planning and buffers
• Allocate funds toward professional advice and depreciation reports
• Enter the market earlier while managing cash flow

When combined with depreciation benefits, this approach can improve overall investment efficiency.

Depreciation and Sale Considerations

It is important to understand that claimed depreciation can affect capital gains tax when you sell.

Key points include:

• Capital works deductions reduce the cost base
• This may increase capital gains tax on sale
• Plant and equipment treatment differs depending on sale structure

This does not mean depreciation is bad. It means you should plan with both short term cash flow and long term outcomes in mind.

A tax adviser can help model scenarios before purchase.

Common Mistakes Commercial Investors Make

Avoid these common errors:

• Not getting a depreciation schedule
• Assuming older buildings have no depreciation value
• Claiming incorrectly without professional advice
• Ignoring long term tax implications
• Treating depreciation as an afterthought

Depreciation should be part of your strategy from the start.