The tax implications of buying a building

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.

So, 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.

Capital works deductions

A tax deduction is available under the Capital Works deduction rules (in Div 43 of the Tax Act) 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 which 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 which qualify for normal depreciation and those which qualify for capital works deductions can be quite fine. For instance, air conditioning units can be depreciated as per the normal rules but the ducting for the air conditioning will qualify under the capital works rules instead.

The rate game

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%
• Industrial buildings (used for manufacturing, timber milling, printing, etc) – 4%
• All other income-producing buildings (such as offices, shops, warehouses and also rented residential properties) – 2.5%
• Structural improvements – 2.5%

In practice, the 2.5% 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% 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.

Want more? Get our newsletter delivered straight to your inbox!  Follow Business Builders on Facebook , X , Instagram , and LinkedIn.