Whilst the changes were made to the depreciation of commercial fit-outs effective from the 2011/2012 tax year we still receive a fair bit of enquiries as to how the new rules apply.
The items of commercial fit-out that can be depreciated are listed in the Commissioner’s table of depreciation rates “Building Fit-Out” category.
The new rules deny a depreciation claim to building structures. Building structures include: foundations, floors, roof, building structure, external walls, stairs, cladding, load bearing internal walls, pillars and partitions, etc. Items that were previously separated such as electrical reticulation, pipes, etc that form part of the walls will no longer be depreciable. Such previously depreciable items will have their depreciation rate reduced to 0% from the beginning of 2011/2012 income tax year. This will result in certain items being carried in the fixed asset schedules that can no longer be depreciated. The disposal of a building that had commercial fit-out split out may still result in depreciation recovered which will be taxable.
New transitional rules were introduced for those who have chosen not to split out the commercial fit-out from the building and as a result have been depreciating the commercial fit-out as part of the building at the building default depreciation rate. These transitional rules provide an opportunity for these taxpayers to take an advantage of a concessionary depreciation of commercial fit-out.
These rules apply to commercial buildings acquired in the 2010/2011 year or earlier, where the commercial building fit-out was not itemised, at the time of acquisition of the building. Any subsequent acquisitions of commercial fit-out that has been separately recognised in a fixed asset register and depreciated after the date the building was acquired will reduce the amount of deduction allowed under the transitional rules.
The amount of the deduction is worked out as 2% straight line of the starting pool. The opening value of the pool is 15% of the building’s adjusted tax value at the end of 2010/2011 tax year adjusted tax book value of any fit out that has been acquired separately from the building and depreciated separately. This can be best illustrated by following example:
Example ABC Ltd
ABC ltd has acquired a commercial building for $ 4 Million. Items of commercial fit-out were not separately identified and depreciated at the time the building was acquired. 12 months later a refurbishment was done. Items of refurbishment were separately identified and depreciated .
At the end of 2010/11 tax year the adjusted tax value of the Building was $ 3.2 Million and the adjusted tax value of Fit-out was $ 100K.
The starting pool is: (15% x $ 3,200,000) – $ 100,000 = $ 380,000
Depreciation allowed is: $ 380,000 x 2% x 12/12 months = $ 7,600
Furthermore, to reduce the complexity, depreciation recovery rules will not apply to the commercial fit-out depreciation, nor a loss on disposal of the commercial fit-out will be allowed as a deduction, under the transitional rules, in the above example once the building is sold. Depreciation recovery will apply to the actual building depreciation that was claimed prior to the 2011/2012 income tax year.