Claiming capital deductions on commercial property: Tyron Hyde

In my 20 odd years as a quantity surveyor, I have never seen more “mortgagee in possession” properties for sale than in the last few years. And this is particularly true for commercial property.

In fact, recent studies indicate that a whopping 25% or more of all commercial properties for sale have been distressed sales.

So what does this say about the commercial real estate market? Well, aside from the fact that now might be a good time to start snapping up bargains, there are other substantial tax benefits to be made. And it all relates to paragraphs 41 & 42 or Tax Ruling 97/25;

Construction cost exceeds purchase price

41. Damian is a property developer who constructs a condominium of 38 units in a popular holiday resort. All units are intended for sale. During the construction period, he sells 28 of the units off-the-plan. After completion of the project, real estate prices drop significantly and he decides to sell the last of the units below cost.

42. David, an investor, buys one of the last units for $95,000. The actual construction cost of the unit to Damian was $105,000. David is entitled to a deduction under Division 43 based on construction expenditure of $105,000.

You see, the capital works deduction is based upon the actual construction cost, in comparison to most depreciating assets that are based upon what you pay for the item.

And as quantity surveyors, we are now preparing depreciation schedules where the construction cost is close to or exceeds the purchase price, just like the above example.

And as far as I’m aware, there is no other way under the Australian taxation system where you can get a deduction greater than what you actually pay for something.

When you buy a car from Mazda, for instance, you don’t ring up Mazda and ask what it cost them to manufacture the car - do you?

Buildings are different.

And if you don’t know the construction costs, TR 97 / 25 states that a report from a quantity surveyor will be accepted.

Remember, you can claim capital works (sometimes called building allowance) on commercial property if construction commenced after July 1982.

For residential buildings, construction must have started after July 1985.

Certain items within commercial properties also attract a higher rate of depreciation – like carpet.

That’s because office carpet gets more wear and tear than carpet in a home.

And it’s not just commercial property prices that have dropped close to or below construction costs. We have also seen this trend in relation to residential property prices in some holiday regions such as Noosa and Cairns.


Tyron Hyde is director of Washington Brown Quantity Surveyors.

His book CLAIM IT! helps property investors maximise their tax benefits through smart deprecation.


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