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.

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 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, an air conditioning unit can be depreciated as 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%
  • 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.

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:

  1. the repayment of the principal, which is a capital expense and not deductible and;
  2. 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:

  • loan procurement fees
  • guarantee fees
  • legal costs
  • stamp duty
  • valuation fees
  • survey fees
  • underwriter’s fees

No deduction is available if the finance doesn’t go ahead.

What about Capital Gains Tax?

If the property has been used in your business, the chances are you’ll qualify either for an exemption from Capital Gains Tax (if you’ve owned the building for long enough) or at least a substantial reduction when the time comes to sell it.

The 15 year exemption: The disposal of the property will be totally exempt from CGT if you have owned the asset for at least 15 years up to the disposal, you are at least 55 years of age and are retiring. The exemption can also be claimed if you become permanently incapacitated, in which case you don’t need to be 55 and nor do you need to retire.

Small business retirement exemption: A taxpayer can choose this exemption to completely eliminate a gain up to a lifetime limit of $500,000. Although commonly used in a retirement situation, it isn’t actually necessary to retire to benefit from it.If you are less than 55 years old just before choosing the retirement exemption, you must pay the CGT exempt amount to a complying super fund or retirement savings account. If you are aged 55 or more just before choosing to use the retirement exemption, you don’t have to pay anything into a complying superannuation fund or RSA, even though you may have been under 55 years old when you actually received the capital proceeds. A common planning strategy for those aged 53 to 54 is to roll their capital gain over using the small business roll over relief (discussed below) and then access the retirement exemption once they turn 55.

50% active asset reduction: Where a capital gain is derived from the sale of an active asset (which will include a building used in your trade), a 50% reduction is available. That’s in addition to the general 50% discount, so taking the two together, the gain is reduced by 75% for entities other than companies (which can’t claim the general 50% discount, but can claim the 50% active asset reduction).This concession is often applied where the 15 year total exemption (above) isn’t available.

Roll-over relief: The fourth small business concession doesn’t exempt a qualifying capital gain from tax at all; it merely defers it. This relief allows a business owner to “rollover” the capital gain derived from the sale of their business assets to one or more new businesses or business assets. The replacement asset must be acquired within a period beginning one year before the disposal and two years after the disposal. If a replacement asset isn’t acquired within this period, the original gain crystallises. Even if this happens, the taxpayer has still managed to defer their gain by up to two years.

H&R Block can help you. Own a business? Talk to H&R Block for advice on how best to do it. Contact our Tax & Business Services team today by email or call 13 40 42 to talk about your business needs.

Mark Chapman is director of tax communications at H&R Block.