Commercial Tax Depreciation Industrial Shed Case Study

The details

The property contains an industrial shed constructed in 2020. The land comprises of 5,781m² with full access control, extended security, and infrastructure to fully support business operations.
The building was completed in 2020 currently managed through an owner-occupied lease.
The income for the building on an annual basis is estimated at gross turnover $190,800 (NSA of 1060 m² area x ARR of $180.00/m²). The expenses for the operation estimated at 65% (-$66,815) which results in a net profit before tax of $123,985.

The approach

In this tax depreciation example, the quantity surveyor applied three methods in the calculation of total depreciation – Small Business (SB), Prime Cost (PC) and Diminishing Value (DV) methods respectively.

Differing criteria, considerations and requirements apply to each method. Based on the data a decision on the best method to be consistently applied for tax depreciation is determined by the accountant in conjunction with the client, based on their circumstances.

The outcome

Claimable tax depreciation

In this example the Small Business method delivers the highest upfront tax depreciation and cash flow benefits.

Total Small Business – Division 40 & Division 43 tax depreciation claims

First year: $684,931

Over 40 years: $6,441,052

The tax depreciation for total operation, consisting of Division 40 (P&L) and Division 43 (B&M), total over a period of 40 years.

Cash flow benefit

The cash flow benefit calculated over a five-year period comparing the three methods are:

Small Business: $188,356
Prime Cost: $40,289
Diminishing Value: $10,385

5 Year Cashflow (Small Business Method)
No Depreciation				Small Business Depreciation
	Net Profit	Tax @ 27.5%	Net Cashflow	Net Profit	Small Business Depreciation	Taxable Profit	Tax @ 27.5%	Net Cashflow
Year 1	123,985	(34,096)	89,889	123,985	(684,931)	(560,946)	154,260	278,245
Year 2	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Year 3	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Year 4	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Year 5	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Total	619,925	(170,479)	449,446	619,925	(684,931)	(65,006)	17,877	637,802
						Benefit	Year 1	188,356
							5 Years	188,356

5 Year Cashflow (Prime Cost Method)
No Depreciation				Prime Cost Depreciation
	Net Profit	Tax @ 27.5%	Net Cashflow	Net Profit	Prime Cost Depreciation	Taxable Profit	Tax @ 27.5%	Net Cashflow
Year 1	123,985	(34,096)	89,889	123,985	(29,301)	94,684	(26,038)	97,947
Year 2	123,985	(34,096)	89,889	123,985	(29,301)	94,684	(26,038)	97,947
Year 3	123,985	(34,096)	89,889	123,985	(29,301)	94,684	(26,038)	97,947
Year 4	123,985	(34,096)	89,889	123,985	(29,301)	94,684	(26,038)	97,947
Year 5	123,985	(34,096)	89,889	123,985	(29,301)	94,684	(26,038)	97,947
Total	619,925	(170,479)	449,446	619,925	(146,505)	473,420	(130,191)	489,735
						Benefit	Year 1	8,058
							5 Years	40,289

5 Year Cashflow (Diminishing Value Method)
No Depreciation				Diminishing Value Depreciation
	Net Profit	Tax @ 27.5%	Net Cashflow	Net Profit	Diminishing Value Depreciation	Taxable Profit	Tax @ 27.5%	Net Cashflow
Year 1	123,985	(34,096)	89,889	123,985	(37,762)	86,223	(23,711)	100,274
Year 2	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Year 3	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Year 4	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Year 5	123,985	(34,096)	89,889	123,985		123,985	(34,096)	89,889
Total	619,925	(170,479)	449,446	619,925	(37,762)	582,163	(160,095)	459,830
						Benefit	Year 1
							5 Years

It is clearly very important to determine the correct method to be used upfront as it may have a major cash flow impact on the business from year one where tax depreciation claims apply. This positive cash flow impact would not have been possible if the owner did not undertake this tax deprecation assessment.

Tax Depreciation For An Industrial Property Tax Depreciation For An Industrial Shed Constructed In 2020

Case Study