Commercial property depreciation is a claim with two sides. The owner of an income-producing commercial property can claim deductions for the building structure (Division 43 capital works) and the plant and equipment within it (Division 40), and a tenant who pays for their own fit out can generally claim those fit out assets separately.
Unlike residential property, the restriction introduced on 9 May 2017 for previously used plant and equipment does not apply to commercial property: both divisions are available regardless of when the property was purchased. Capital works are generally claimed at 2.5% a year (a 4% rate applies to some categories, including certain manufacturing and short-term accommodation properties). What you can claim depends on the property, its use and your circumstances, so confirm your position with your accountant.
How does commercial property depreciation work?
Tax depreciation lets property investors claim deductions for the wear and tear of a building (Division 43 capital works) and the plant and equipment inside it (Division 40). These deductions can lower taxable income, which may reduce the tax payable, depending on individual circumstances.
Division 43 covers the building structure: walls, floor slabs, roofing and the fixed elements that form part of the building, including leasehold improvements such as shop fitouts. Division 40 covers removable plant and equipment (air conditioning, carpets, blinds), with each asset depreciated over its effective life under the ATO’s Income Tax Assessment (Effective Life of Depreciating Assets) Determination 2025. A single depreciation schedule sets out both.
What sets commercial property apart is who can claim. A commercial building can carry more than one claim at the same time: the owner claims on the building and the assets they installed, and a tenant claims on the fitout they paid for. Those claims are worked out separately and don’t overlap. The other difference is eligibility: the 2017 restriction that cuts most second-hand residential plant claims does not apply to commercial property.
If you want the residential picture for comparison, read how Division 40 and Division 43 work, or start with what a depreciation schedule is.
Why doesn’t the 2017 restriction apply to commercial property?
The 9 May 2017 restriction on previously used plant and equipment applies to residential accommodation, not commercial property. A buyer of a second-hand office, shop or warehouse can still claim Division 40 deductions on the existing plant in the building.
The rule itself: since 9 May 2017, Division 40 deductions on previously used plant in second-hand residential property are restricted to the original owner or installer. New property, new plant the investor installs, substantially renovated property and commercial property are not affected.
This isn’t a grey area: the restriction (section 40-27 of the Income Tax Assessment Act 1997) is written around residential accommodation, and the ATO’s guidance on second-hand depreciating assets confirms the test is how the property is used, not what it looks like. Even a house leased out as a doctor’s surgery counts as commercial use and sits outside the rule.
For a commercial buyer, that means the plant already in the building, the air conditioning, carpets and blinds, is claimable whatever the building’s age and however many owners it has had. A residential investor buying an established property after 9 May 2017 gets no claim on the equivalent assets.
One caution: the exemption applies to commercial property. A mixed-use building, say shops at street level with apartments above, needs each part assessed on its use. Don’t assume the whole property sits outside the restriction; have the position confirmed for your circumstances.
What can tenants claim on fitouts?
A tenant who pays for their own fitout can generally claim depreciation on it: Division 40 on the plant and equipment they install, and Division 43 capital works on the structural fitout they paid for. The owner keeps the claim on the building itself. The tenant’s fitout isn’t the owner’s claim, and the owner’s building isn’t the tenant’s.
The ATO treats leasehold improvements, including shop fitouts, as capital works, claimed at the statutory rate of 2.5% or 4%. A lessee who incurred the construction expenditure can generally claim the deduction while they hold the lease. Plant and equipment the tenant buys and installs is the tenant’s Division 40 claim in the ordinary way.
Here is how the two claims sit side by side:
| Owner | Tenant | |
|---|---|---|
| Building structure (Division 43) | Claims capital works on the building | No claim on the owner’s building |
| Owner-installed plant (Division 40) | Claims over effective life | No claim |
| Tenant-funded fitout (Division 40 and 43) | No claim on the tenant’s assets | Claims own fitout assets |
| On vacating or refit | Scrapping may apply to removed assets | Scrapping may apply to abandoned fitout |
The word “generally” matters here. Lease terms change outcomes: who owns the fitout at the end of the lease, make-good obligations, landlord contributions and incentive arrangements can all shift who is entitled to claim what. Both owner and tenant should confirm their position with their accountant before relying on a claim.
What happens when a tenant vacates?
When assets or fitout are removed, demolished or replaced, their remaining undeducted value may be written off in the year of disposal. This is usually called scrapping, and it applies to commercial refits in a way it often can’t for second-hand residential property, because commercial property is unaffected by the 2017 restriction.
End-of-lease refits and tenancy changeovers are where these claims most often arise. A before-and-after inspection by a Quantity Surveyor supports the claim by documenting what was in place before the works and what was removed. Whether a scrapping claim is available depends on the assets, the ownership position and the circumstances of the disposal, so treat it as a question for your accountant and your QS together.
Which commercial property types qualify, and at what rates?
Division 43 capital works are generally claimed at 2.5% a year for up to 40 years from completion of construction (a 4% over 25 years rate applies to limited categories). The 4% categories include certain manufacturing and industrial buildings and some short-term traveller accommodation, depending on when construction began and how the building is used.
Eligibility turns on when construction commenced, and the rate differs by property type:
| Construction commenced | Offices, warehouses and other commercial | Manufacturing | Hotels, motels and guest houses |
|---|---|---|---|
| 22 Aug 1979 to 19 Jul 1982 | Not claimable | Not claimable | 2.5% |
| 20 Jul 1982 to 21 Aug 1984 | 2.5% | 2.5% | 2.5% |
| 22 Aug 1984 to 15 Sep 1987 | 4% | 4% | 4% |
| 16 Sep 1987 to 26 Feb 1992 | 2.5% | 2.5% | 2.5% |
| 27 Feb 1992 onwards | 2.5% | 4% | 4% |
Original construction commenced before these dates is generally not claimable, but later renovations, extensions and structural improvements are, from their own completion dates: a 1970s warehouse has no claim on the original build, yet a 2010 extension is claimable.
The rate also depends on use, not just the date, and it’s set by when construction commenced, not when you bought the property. The hotel and motel 4% rates apply to short-term traveller accommodation with at least 10 rooms, apartments or units, and the manufacturing 4% rate applies where the building is used for industrial activities. Transitional exceptions can apply to some pre-16 September 1987 construction contracts.
The same framework applies whether the property type is an office, retail premises, warehouse, a medical or childcare facility, a hotel or motel, a pub or club, or an agricultural property, though the asset mix and the applicable rate vary by type.
Who works out these deductions?
The ATO recognises Quantity Surveyors (TR 97/25) as appropriately qualified to estimate construction costs where actual costs are not known. Accountants, valuers and real estate agents generally are not.
Commercial buildings often date back decades and have changed hands several times, so original construction costs are rarely available. A Quantity Surveyor inspects the property, estimates the qualifying construction expenditure and identifies the plant and equipment, then sets it all out in a depreciation schedule your accountant applies at tax time. TDA’s depreciation schedules are prepared by qualified Quantity Surveyors.
Getting a commercial depreciation schedule
If you own or lease commercial property and haven’t looked at depreciation, the starting point is a depreciation schedule prepared for your specific property and position, whether that’s an owner’s claim, a tenant’s fitout claim, or both sides of the same building.
Reports are completed within 3 to 5 business days from receipt of all requested information and inspection completed. If we can’t deliver at least double our fee in deductions in the first full financial year, there will be no charge for our service.
Commercial depreciation schedules are scoped to the property, so request a quote for your property or call us on 1300 417 317. And because a depreciation schedule identifies what is claimable rather than telling you what to do with it, talk to your accountant about how the deductions apply to your circumstances.
