Owning a business property: the tax implications

They say McDonalds didn’t get to be the corporate giant it is today by selling burgers; it got there by buying the real estate the burgers are sold from. Mark Chapman Director of Tax Communications with H&R Block Australia, explains the benefits and tax implications of owning your business premises

If your business gets to a financial position where it can buy the premises from which the business operates (rather than renting, which is probably more common), it makes a lot of sense to make that investment.

The cost of many commercial buildings can be written off for tax purposes over time, but the rules are different to the normal depreciation rules.

A tax deduction is available under the Capital Works deduction rules for the following capital expenditure:

buildings or extensions, alterations or improvements to a building
structural improvements such as sealed driveways, fences and retaining walls
earthworks for environmental protection, such as embankments

As well as the frame of the building itself (walls, ceiling, roof, etc), the sort of things that can be included in a claim could include items as diverse as bathroom equipment, doors, windows, tiling and cupboards. The cost of the land is excluded.

TIP: The distinction between items that qualify for normal depreciation and those that qualify for capital works deductions can be quite fine. For instance, an air conditioning unit can be depreciated as a plant over its effective life but the ducting for the air conditioning will qualify under the capital works rules instead.

Different rates apply depending on when the building was constructed and what the building is used for.

Where construction commenced after 27 February 1992, the following rates apply:

Short-term traveller accommodation (such as hotels, hostels, etc) – 4 per cent
Industrial buildings (used for manufacturing, timber milling, printing, etc) – 4 per cent
All other income-producing buildings (such as offices, shops, warehouses and also rented residential properties) – 2.5 per cent
Structural improvements – 2.5 per cent

In practice, the 2.5 per cent rate will be the most commonly applied.

If you buy a second-hand building, you continue to make a claim at the same rate and based on the same cost as the original owner, until the claim period ends (40 years after construction was completed for buildings on the 2.5 per cent rate).

If you can’t obtain detailed construction information for the purposes of working out the cost, you can use an estimate, provided it was prepared by a suitably qualified person such as a quantity surveyor.

CGT and capital works

If you dispose of the building and you have claimed a capital works deduction during the ownership period, you need to reduce the base cost for CGT by the total amounts you have claimed as a capital works deduction. This prevents you getting tax relief for the cost of the building twice on the same amounts.

Claiming a deduction for interest on loans taken out to buy the building

Chances are, you will face a choice as to how the purchase of the building is financed. In some cases, the business may be sufficiently profitable that the acquisition can be financed from internally generated capital. In most cases, it will be necessary to look to external finance to secure the funds to make the acquisition.

If you borrow money to buy a building, interest paid on that finance will generally be tax deductible, provided all the borrowed funds are used for business purposes (you’ll need to apportion the interest if some of the finance is used for private or domestic purposes).

Loan payments consist of two elements:

the repayment of the principal, which is a capital expense and not deductible and;
the interest element (cost of finance) which will be deductible where the loan is for business purposes.

Interest is deductible immediately even where the borrowed funds are used to acquire capital assets, such as property or plant.

Costs incurred in arranging a borrowing are also deductible by the business, as are costs incurred in discharging a loan. That might include: