Unfortunately, many hotel owners are missing out on valuable cash flow dollars, because they have not claimed maximum deductions for capital allowance and depreciation of their building and business assets.
Here are our top 4 tips for maximising hotel depreciation deductions for capital allowance and depreciation in your hotel.
1. When purchasing, maximise the value of plant and equipment in the contract of sale – or leave it silent
If you are in the process of purchasing a hotel, you may want to consider leaving the attribution of purchase price between Goodwill and Plant and Equipment as blank, or at least until you have had a quantity surveyor complete a detailed, valued asset inventory.
When the contract of sale stipulates the specific value of Plant and Equipment, that becomes the maximum value attributable to the Plant and Equipment items listed in the inventory. Where the contract value remains blank, this limitation no longer exists.
As an example, if your contract of sale stipulated a Plant and Equipment value of $100,000 for an attached inventory of assets, then that $100,000 maximum has to be dissected and applied against the individual assets listed in inventory, to a maximum of $100,000 only.
But what if the actual sum value of those assets is higher? If a quantity surveyor were engaged to independently assess and value all of the assets and their results reported a total asset value of $150,000, that is $50,000 worth of assets that wouldn’t be claimable for depreciation due to the limit imposed by the stipulated contract value.
That’s $50,000 less tax deductions claimable over the life of those assets.
For more detailed information about this tip, check out a related article Buying a Pub? Use this tip to ensure a cash flow advantage up front…
2. Ensure you have a detailed inventory of all plant and equipment assets and that their values and effective lives have been properly assessed
If the purchase of your hotel is now in the past, and your current actual assets no longer reflect the inventory at time of purchase, engage a quantity surveyor to complete a hotel depreciation schedule to ensure you are depreciating all of your assets from the most appropriate value for a suitable effective life.
Whilst the ATO does prescribe effective lives for hotel plant and equipment assets, a quantity surveyor is recognised as qualified to adjust values and effective lives of plant and equipment following inspection and assessment.
This process also ensures no assets are missed, and that future plans for the hotel and the Plant and Equipment assets can be considered.
An accountant is not recognised by the ATO as qualified to value plant and equipment assets, nor determine their suitable effective lives.
3. Maximise deduction opportunities when renovating or refurbishing
With hotels being refurbished so often, it is important that hotel owners ensure their depreciation schedules remain current to maximise ongoing deductions for capital works and plant and equipment depreciation.
Ideally engage your quantity surveyor when you are about to commence any significant works. Your quantity surveyor will ensure that all assets that will be disposed of are accurately recorded for disposal (scrapping) values – don’t throw out deductions when you throw out your old assets!! Old carpet, furniture, bars, fridges etc all have value.
At the completion of the works, your quantity surveyor will return to assess and report on the new works and ensure all works and new assets are accurately costed, recorded and that the annual depreciation figures are reported for their remaining lives.
Engaging a quantity surveyor for this purpose is particularly important if you do not have records of all expenses. In this case where records are missing or incomplete, a quantity surveyor is qualified to estimate construction costs and asset values to ensure that you remain ATO compliant, and that all capital works and assets are recorded and depreciated going forward for maximum effect for the business.
4. Ensure your depreciation schedule has been prepared by an industry specialist
The construction of a hotel and it’s included assets are vastly different to the building and assets of a standard residential property.
A specialist quantity surveyor will know their way around a hotel, know and understand the costs of construction and asset values as well as applicable legislation. A specialist will have a deep understanding of the detail around how to maximise depreciation for maximum cash flow benefit.
Grouping and pooling of assets, utilisation of immediate write-off provisions and attributing appropriate values and effective lives for assets can all make substantial differences in the outcome of a report and therefore the cash flow of a hotel business.