Two Reasons Why Commercial Property Beats Residential In Depreciation Deductions


Investing in property, whether residential or commercial, should not be done with a view to solely minimising tax or maximising deductions. Yet it happens. Indeed, many accountants speak of clients coming into their office with the claim that they “need to buy an investment property because they’re paying too much tax”. Even the most enthusiastic masochist would unlikely enjoy paying a lump of tax, but we should not fear the stick of tax so much that the carrot of why we started investing in the first place (capital growth, passive income, retiring on our own island) loses its lustre.


Now that the obligatory disclaimer is out of the way, commercial property investing is a smashing way to maximise your tax deductions. Here’s why;


1. Plant and equipment items are still on offer


I am going to avoid a long-winded explanation of depreciation legislation but, these days unless you buy a brand-new residential property, you will miss out on all the juicy plant and equipment deductions. You can still get them if you add the new items yourself, but the fact remains that if you buy a one-year old property, you won’t get your hands on the thousands of dollars’ worth of plant item claims.


Here’s where commercial property wins. The legislation only applies to residential property, so you can still claim the residual values on commercial properties that are not purchased brand new. This avoids the claims being cut in about half, such as what happened to residential claims.


2. The list of effective life legislation is 98% commercial only


There are 267 pages of effective life legislation as per TR 2020/3 which is the applicable legislation at the time of writing. This document outlines the list of all qualifying plant and equipment items.


A massive 262 of those pages are only related to commercial property, with a measly 5.5 covering residential. Not it’s true that it’s partly due to the many different commercial industries, but the fact remains that commercial has much more plant and equipment items to choose from.

Why does that matter? Well when it comes to deductions, there are only two main categories. There is the building itself, and then the plant and equipment. Most buildings will depreciate at 2.5% per year. However, plant and equipment will normally be more than ten times that amount. So, when it comes to bang for buck deductions, plant and equipment gives you some upfront wins.


I can think of a few more reasons why commercial can be great, there is the building value to market value ratio, the more expensive fixtures and fittings, but these two points I’ve singled out are standouts for me.


If you have a commercial investment property, well done. Now that you have celebrated the investment, be sure to contact a quantity surveyor to take advantage of those deductions.


Mike Mortlock is a cofounder of MCG Quantity Surveyors and is an industry leader in tax depreciation. Mike has worked as an expert depreciation consultant with a number of major firms such as McDonalds, CMC Markets, Deloitte, PwC and more. He has completed thousands of depreciation schedules for commercial and residential property and is in demand as a public speaker and property commentator having been featured in Australian Property Investor, Smart Property Investor, Property Observer, Sky Business and other print and radio publications. As a specialist in tax depreciation, Mike has a wealth of knowledge and a passion for maximising depreciation entitlements. It is this passion that results in outstanding results for MCG's clients.


Outside of work Mike is a keen musician and an elite amateur triathlete, having represented Australia.


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