Commonly Asked Questions...
Can’t my accountant estimate construction costs for tax depreciation purposes?
No, accountants can apply actual costs, but are not qualified to estimate construction costs. Tax Ruling 97/25 of the Income Tax Assessment Act (1997) specifically states that “valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.” In order to maximise your depreciation claim you need to have a report prepared by an appropriately qualified professional – a Quantity Surveyor!
How much can I expect to pay for a tax depreciation report?
You could expect to pay anywhere between $600 and $1,000 for a tax depreciation report for a standard residential property in either metropolitan or regional areas, depending on who you speak to. Some companies offer tax depreciation reports in the $300 to $500 range; however you need to be careful and make sure that:
A)Their staff have the relevant qualifications and experience;
B)A qualified quantity surveyor will conduct a full inspection;
C)You won’t get hit with any extra fees for council searches or for including renovation costs in the report;
D)The quantity surveyor knows how to fully maximise your capital allowance and tax depreciation entitlements.
What should I look for in a Quantity Surveyor?
First and foremost, your quantity surveyor should conduct a full inspection of the property and have at least 5 years experience in preparing capital allowance and tax depreciation reports that are tailored specifically to the investor’s financial situation. A tax depreciation report is not just a table of costs and dates; it is a complete exercise that requires the utmost attention to detail both in the office and on site. Your quantity surveyor should be able to provide over the phone estimates of the potential claims you could expect to make as an investor, and then follow through with an accurate report. Your quantity surveyor should be available for consultation to you and/or your accountant as often as required either before, during or after the report is complete. The quantity surveyor should also be responsible for arranging access to the property and should bear the cost of any travel expenses or council/authority searches that may be required to fulfil their service promise to you. And finally, your quantity surveyor should also have the integrity to advise you not to proceed with the tax depreciation report if they feel the exercise will not stack up in your favour.
What should I look for in a tax depreciation report?
A tax depreciation report is much more than just a table of costs. In order to fully maximise your claim, and to save your accountant time (which ultimately saves you money) you need to ensure your quantity surveyor will provide the following:
A summary of property information
A methodology explaining how the report was compiled
A detailed list of plant and equipment assets
Schedules for diminishing value method
Schedules for low cost and low value pooling
Schedules for prime cost method
Nominated effective lives for every each plant and equipment asset
Nominated depreciation rate applicable for each plant and equipment asset
A table of division 43 building works, including any renovations by the investor
40 year projection covering you for the life of the building
Won’t any quantity surveyor be able to provide a report with all the features listed above?
Unfortunately, no. Some quantity surveyor firms like to cut down on the resources required to produce a tax depreciation report – they may not conduct an inspection of the premises which means they can’t put an accurate value on plant items, or they may not spend the time needed to provide the full service as outlined above. This often results in a cheaper and somewhat inferior product – and although the report may save you $200 on the fee, it could end up costing you THOUSANDS in overlooked tax deductions. Only a handful of companies including Capital Claims provide a fully rounded service as detailed above.
Why is it important to have a quantity surveyor inspect the property? Wouldn’t it be cheaper for me to do a self assessment?
Quantity surveyors are specifically trained to accurately measure and assess rental properties to extract the highest tax depreciation claim available to the investor. They know exactly what they are looking for as soon as they arrive on site. Every tiny little detail in the property is assessed including things like door closers, smoke alarms and even shower curtains! The quantity surveyor will also note the brand, model and size of all of the big ticket items such as kitchen appliances, air conditioners and hot water systems. Every square mm in the house is measured to ensure nothing is missed. As we said, without a full quantity surveyor inspection you run the risk of missing thousands of dollars in missed tax deductions.
What information will I need to provide my quantity surveyor?
Once you’re satisfied that your quantity surveyor will provide a premium service like the one listed above, there is little else you need to do. All you need to do is provide:
1)Full name, address, contact numbers and email address
2)Your accountants name
3)Rental property address
4)Property manager details
5)Purchase price, settlement date and renovation details (if applicable)
Other than that your quantity surveyor should be able to follow up on council searches to find out the age of the building, the land value and any other relevant details that will streamline the process for you.
My property has tenants living in it, will this be a problem?
Not at all. At Capital Claims we are committed to looking after your investment, and this extends to being flexible with your tenants so they are not put out or upset by our visit. Our staff will liaise with your property manager and your tenant to find a time that is suitable to conduct a full and thorough inspection of the property.
How long does the whole process usually take?
Depending on the availability of your tenants, we can usually gain access within a week of you giving us the instruction to proceed. Our turnaround from inspection is approx 3-5 business days – the fastest in the industry.
My property has been subject to pre and post-purchase renovations. Will this be factored into the inspection and preparation of the report?
Definitely! It’s all about maximising your tax deductions and putting as much money as we can back in your pocket. You will be asked at the enquiry stage if you have added any improvements, which we will include in the report at no extra cost. We will also conduct a thorough inspection and historical records search in an attempt to uncover any works the previous owners may have carried out on the building. If we find the right evidence, our expertise allows us to estimate a value that can be included in your tax assessment.
I lived in the property for a number of years before renting it out; will there be any tax depreciation left?
It would depend on how long ago you bought property, but in most cases yes. Ordinarily we aim to maximise tax depreciation deductions immediately upon purchase of the property. However, as you are unable to claim tax depreciation for the period you were living there, we will re-structure the report (within the ATO guidelines) to minimise the depreciation claimed for the period you occupied the building and maximise depreciation in the period it was leased, or available for lease.
What happens once the report is complete?
Once the report is complete and the invoice has been settled a soft copy will be emailed to you and your accountant. The best thing about our reports is that they provide a complete summary of claims for your accountant to include in your tax assessment. This saves your accountant time, which in turn saves you money over and above the tax savings represented in the report. We are available for consultation with your accountant at all times either before, during or after the report is complete. In fact we enjoy solid working relationships with many accountants who benefit from this level of service, so we’re more than happy to deal directly with your accountant if that is more convenient for you.
How does having a tax depreciation report affect CGT? And is it still worthwhile?
We have come across case where some property investors chose not to claims the division 43 capital works allowance, because they were afraid that it would reduce their cost base and therefore increase their Capital Gains Tax liability if/when they sell the property. A couple of things those investors may not have considered:
•If you own the investment for more than 12 months, you are eligible for a 50% discount on your CGT liability; plus
•Claiming the full depreciation benefits of an investment form the beginning gives you the opportunity to use that additional cash now (perhaps to reinvest, pay down liabilities etc), as opposed to realising a potential saving in your CGT liability at some time in the future, if/when you dispose of the property. Remember, a dollar in your hand today is more valuable (holds more purchasing power), than a dollar in your hand sometime in the future.
Therefore it makes sense to claim every deduction available to you as early as possible.
When I do work on my investment property i.e. refurbishment, renovations – when is it repairs and maintenance and when does it need to be depreciated?
This can sometimes be a little bit of a grey area, and you need to make sure you are not claiming improvements as repairs, and vice versa. Generally speaking, a repair is something which restores an asset back to its original condition. For example: if you bought a brand new investment property, and the tenants scratched some paint off the walls while moving furniture, when you paint that wall you are repairing or restoring it back to the condition it was in when you first bought it. This would be considered a repair, which you could write off immediately.
However, if you bought an existing property and decided to paint the walls in an effort to improve the condition of the building from when you first purchased it, this would be considered a capital improvement which you would write off annually at 2.5% per annum (for a residential property).
Under what circumstances would I need to have a tax depreciation report re-done?
Our tax depreciation reports last you for the life time of the building, assuming it remains in the condition it was in when we conducted the initial inspection. If you add minor improvements over the years such as a new hot water heater, or you added a swimming pool or garage, simply take your receipts along to your accountant and he/she will include them in your yearly tax assessments.
The only time you would need a second report was if you carried out substantial renovations/refurbishments from the time that the original tax depreciation report was compiled.
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