The 4% rate for the Special Building Write-Off is a great thing and not surprisingly we have many clients who are keen to claim it.

It’s also not surprising that the ATO are fairly strict on what buildings and situations qualify.

And it won’t surprise you to know there are some grey areas. If in doubt, give us a shout. (Hey, I like that!) To make an enquiry, use your booking link or email us at affiliates@depreciator.com.au 

Backing up a bit, why is 4% vs 2.5% even an option? 

There is a logic to it. The building write-off is compensation for wear and tear on a building. It stands to reason that the activities carried out in some buildings result in more wear and tear. Hence the higher allowable claim.

In our 20 plus years of doing Depreciation Schedules we have done many where the 4% rate is appropriate. But there are many more times when clients, and some accountants, have assumed they were in line for 4% only to have their expectations cruelly dashed.

So when is the 4% building write-off an option? Manufacturing properties qualify – we have written out them previously here.

As do properties designated as being for Short Term Travellers – the definition of this often surprises people.

And then there is a provision for people who own multiple properties in the one building.

Key Points

• Properties where manufacturing activities take place are eligible to claim the 4% to account for the additional wear and tear to the building as a result.
• Short Term Traveller Accommodation properties are also eligible to claim the 4% as determined by the nature of the property and it’s intended use, for example, a hostel with dormitories.
• It’s tax season! If you have a client with an existing Depreciation Schedule from Depreciator that needs updating with improvements made in the last financial year, please ask them to reach out to us.
  

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So how is a ‘manufacturing’ property different from other commercial properties?

‘Commercial property’ is a bit of a catch-all label. It covers most properties where business is carried out, as opposed to properties where people live.

Consider the range of property types that could be labelled commercial. There are shops and cafes, offices, warehouses, factories and farms. We of course do them all.

Factories are what we are interested in when we consider the eligibility for 4%. Shops, cafes, offices and warehouses don’t qualify. If we go back to that early logic, it would be because the activities carried out in them are not ones that result in excessive wear and tear on the building.

So what constitutes a ‘manufacturing property’? Some years ago, a very helpful person at the ATO told us one way to think of it is this: a manufacturing property is one where materials enter and are manipulated and leave as something very different. 

Now this is obvious when it comes to something like a refinery or a chemical plant, but less obvious for typical urban businesses. The very helpful ATO bloke used a kitchen maker as an example. Trucks deliver sheet goods and hardware and machinery is used to transform them into something very different. He also mentioned window makers where aluminium sections show up on trucks and they are cut and fashioned and glazed. 

As you can imagine, these activities cause more wear and tear on a building than storage of goods, for example.

Short Term Traveller Accommodation

Short Term Traveller Accommodation qualifies for 4%, but the definition of this type of property surprises people.

What is relevant is not so much the usage pattern of the property, but more the nature of the property itself.

When we write ‘the usage pattern’ we mean how the property is used. People logically think that if nobody ever stays in a property for longer than a couple of weeks, it qualifies as Short Term Traveller Accommodation. Nah.

Years ago we had a client with a lovely property in Thredbo. Nobody ever stayed there longer than a fortnight because it was so staggeringly expensive. But it was a luxuriously appointed house and somebody (me, perhaps) could happily live there forever. We told the client that property did not qualify as Short Term Traveller Accommodation, but it took a Private Ruling from the ATO to convince them.

Then there are serviced apartments where the conditions of the lease, usually with a pseudo hotel, prevent people staying too long. Again, it took a Private Ruling from the ATO to convince a client that this property did not qualify. If it’s an apartment with a kitchen and bathroom etc, it is not something built just for travellers.

Just recently we had a client who built a house with seven bedrooms all with ensuites. It’s located near a hospital and the plan is to rent it out to hospital workers on short leases. Again, the intended usage does not make it Short Term Traveller Accommodation. It’s just a big house with lots of bedrooms – and bathrooms. Perfect for a family with six teenagers.

What about a hostel with dormitories and shared bathrooms and kitchens? Yep – 4%. The logic there being that nobody is going to live in the property long term because of the nature of the property – imagine sharing a room indefinitely with an ever changing roster of smelly backpackers…

It’s also possible to buy rooms in hotels. Arguably, if it’s just a room and the only kitchen is a bench with a small sink and a microwave, it’s not really a place someone could live long term so these arguably qualify for 4%.

Boarding houses can be tricky. The ATO told us once that if a boarding house has an onsite manager, it would qualify. Otherwise it’s just a big house with multiple tenants some of whom may stay forever.

And then there is the exception for people who own more than 10 apartments in the one building. They can claim 4%. The logic there being that it would appear they are running an accommodation business. We have only twice in over 20 years come across a situation like this and both times we suggested the client get confirmation from the ATO. 

 So as you can see, there are, as always, some grey areas. We are always happy to discuss properties with your clients and give them, and you, the benefit of our significant experience.

Our free update service

A lot of accountants don’t realise we do this.

You know what’s like in tax season when clients come to you with receipts for work they have done to their rental properties. The first thing you need to do is work out if they are repairs or improvements – more about that blurry line here.

Then having worked out what can be expensed vs what needs to be depreciated, you then need to manage the improvements alongside the Depreciation Schedule. Wouldn’t it be good if they were all incorporated into a revised Depreciation Schedule?

That’s what we do. We add the works deemed to be improvements to the existing Depreciation Schedule and we send a revised Schedule to you and the client. You can read more on this here.

Often clients come to us first with their list of expenditure and we suggest what things their accountant might be able to expense and we take up the remainder.

Enquire now for a property-specific assessment

Has this article reminded you about a client’s investment property? Residential properties, commercial properties, even farms, we do them all.

If you want us to talk to a client about a Depreciation Schedule, make a no-obligation enquiry and rely on our 20-plus years of experience in estimating depreciation returns.