Forum Replies Created
Hi Derek,
Accomodation built for short term travellers is still depreciable at 4% (building).I think it was May last year when the ATO released an Interpretative Decision on what constitutes ‘short term traveller accomodation’. It is prudent to abide by Interpretative Decisions as they tend to be an ATO reference point in the event of an audit.
In short, the nature of the accomodation is crucial, as opposed to its prevailing usage. An apartment will always be regarded as an apartment by the ATO even if nobody ever stays there for more than a week at a time.
Let’s say somebody owns an apartment in a building on the Sunshine Coast that has an onsite manager, a restaurant, room service, a desk for tour operators etc etc. And it is used exclusively by short term travellers. If it’s an apartment, depreciation on the building is 2.5%.
I say to people if they could live in their property, it’s not ‘short term traveller accomodation’. So if a property has a seperate bedroom or 2, bathrooms, a kitchen, perhaps a laundry, it’s depreciable at 2.5%
So what does constitute ‘short term traveller accomodation’? A hotel or motel room would – you can buy into hotels. These would typically not have a kitchen or laundry. They may only have a kettle and a bar fridge i.e. you couldn’t really live there long term. It’s a pretty tight definition.
This Interpretative Decision will affect people with holiday houses, units, ski lodges, serviced apartments etc. If the ATO decide to target this group, they will make a killing.
Can a taxpayer fight the Decision? Sure. I tend to avoid fights with the ATO, though – we tread a fine line between being aggressive and conservative.
Remember everyone, if an investor pays for a Tax Depreciation Schedule and uses it in their tax return, the liability for any errors lies with the taxpayer, not the QS. The taxpayer is the client of the ATO.
Hope the above makes sense. If anyone wants a copy of the Decision, e-mail me and I’ll dig it out.
ScottHi Jack,
I’ve bought one through them – a holiday unit on the NSW coast. They seemed okay. No sign of any two tiered nonsense. They would have a big data base and would be used by developers to flog property. I didn’t pay alot of attention to their cash flow projections – I just figured they would be inflated. I did some sniffing around of my own and the purchase stacked up.
Kay is right, like most of these guys they use depreciation to make the purchase stack up. And on the place I bought they used the wrong percentage for the building write-off. They had it at 4% instead of 2.5%.
ScottYep. Perth is easy, but the rest of WA is tricky – it’s a big state and QSs tend to live in cities. I believe one of my Perth guys is heading to Kalgoorlie in the next week or so. The east coast is easier to cover because there are lots of big regional centres. I’ve got guys in Cairns, Townsville (Mackay from memory – system is down) Rockhampton, Gladstone, Bundaberg etc etc.
How’s that for a blatant plug. now, to see what those bloody programers are up too…Gee Derek, and we were getting on so well. You’re plugging Deppro when I’m in here dispensing free advice?
Luke, I’ve got guys in Perth, too. In fact we cover more of the country than any other QS group. And we only use Quantity Surveyors to carry out inspections – one company that shall remain nameless say they do but they don’t.
Re: Your 70’s unit. Mel is right – putting a value on the assets you throw out is important as you can claim the undepreciated proportion as a lump sum. To ‘dispose’ of assets, you need to make sure they are kept out of the Low Value Pool – your accountant will be able to explain why. Remember though, the ATO allows taxpayers to self assess the value of Depreciable Assets (Fixtures and Fittings). It’s when it comes to building work you particularly need a QS. I’m just wondering whether it’s worth paying a QS when the only things likely to be disposed of in that unit are the carpet, some kitchen appliances and perhaps blinds/curtains. You could put a value on them yourself. Essentially the value would be the second hand installed cost. Then when you do the reno, you’ll have all your receipts and if you’ve got a half decent accountant again you won’t need a QS. (Not only am I handing out free advice, I’m talking you out of commissioning a schedule.)
Remember all of you, QSs are starting to get busy. Tax season is just around the corner. That’s why I’m at work now. I’ve got programers working on changes to our system to take into account the new ATO rules. (And we all know programers need someone to keep an eye on them.)
Scott – Depreciator 1300 660033
I like little blocks of units. That one sounds very expensive relative to the returns, though. At $100K each for a one bedder, the location must be good – capital city? ocean views?. There was string in the forum not so long ago about converting blocks to strata title. Not sure whether a definitive list could be put together from the comments. First stop would be the council. You’ll need a strata plan. You’re going to need seperate water and power meters. It will have to conform to the relevant fire code – this can be a costly one. They’re the most obvious ones.
I settle on my first ever off-the-plan purchase toward the end of June. And no, it’s not a city apartment. It’s a holiday unit in Port Macquarie – 30% on paper gain since contract exchange. And the bank will lend on the current valuation. It will be very -cf (loads of depreciation, too). There’s also a place in Tasmania I’m looking at. It will be +cf. I really want to pick up another Sydney property, though. No hurry there.
Given the ATO will be looking very closely at property investors this year that may be wise Marisa.
No idea Shaun.
When I look for a competent professional – solicitor, doctor, architect, mechanic – their fee per hour is the last thing I consider. I’m always willing to pay a bit extra for someone who knows what’s they’re doing. I figure it’s possibly going to save me problems down the track.
It’s the same in my business. There are loads of cheaper Quantity Surveyors around, but I know the Tax Depreciation Schedules they turn out won’t stand up to an audit.
ScottHi Marisa,
Derek is right, in the event of an audit you would need plenty of evidence to support any assertion that the proerty was available for rent and available at a market rate. I’d say the ATO would find it hard to swallow the fact that you had no luck at all renting it out. You need to imagine yourself sitting across the desk from an embittered public servant and trying to explain why nobody ever wanted to stay in your furnished holiday house despite your best efforts at renting it out. Be careful.
ScottHi Marty,
You only pay tax on any depreciation claimed on the building, not on the Depreciable Assets/Fixtures and Fittings. In many cases, depreciation claimed on the building is less than that claimed on the Assets.
ScottNot quite James.
There is a fair bit of confusion around depreciation. It’s divided into to 2 main components: the building (=Special Building Write-Off or Division 43) and Goods and Chattles (=Fixtures and Fittings or Depreciable Assets).
It is only the depreciation that has been claimed on the building that reduces the cost base in the event of CGT.
Regarding written down value of assets, CastleDreamer. I’ve never seen a residential contract that has this included. Commercial property ones generally do. It’s not difficult, but you’d probably have to guide whoever prepares the contract through – the average solicitor may need assistance.
Scott
I know a fantastic one – Alan Webb-Mole from BTS Financial Services (60561929). He was quoted in The Australian and the The Age (along with us) recently in relation to the upcoming big changes to depreciation rules.
ScottMy guys down there tell me the boom is well and truly over for the time being at least. According to them Melbourne and Sydney buyers drove the prices up, but there has been little movement of late. I would expect prices to pull back in the winter. I bought in Somerset this time last year.
ScottMorning MarkyMark,
In answer to your questions:Question 1
You said:
the place would need to be tenanted for a while before you can legitimately claim for any repairs.
Because there is a tenant does that satisfy this requirement?Nope. You need to own the property and have it rented (or available for rent) for a while before you can claim anything as a repair. Six months would be a safe period depending on the extent of work you do.
Question 2
One other thing,
Can you suggest any really good resources for these sorts of issues? I will do a search myself anyway.I’d be your best resource. There is a fair bit of stuff on the ATO site, but finding it isn’t always easy. The Master Tax Guide is okay, but it’s a 2,000 page book and it will cost you over $100. You could try the AIQS – Australian Institute of Quantity Surveyors – but they don’t have a great handle on tax. If you post a question on this forum and I’m travelling and don’t see it, send me an e-mail. I get a hundred or so a day but I always respond to them.
It’s only my opinion and I’ll probably be shot down in flames in minutes by someone here, but if there is a tenant in place who has agreed to a rent increase, I would leave them there, even if they’re still paying a bit below market rent. Let’s say you kick them out and then spend 2 weeks and $4,000 tarting the place up. Then it takes a few weeks to find another tenant. It’s going to take you a long time to make up the loss from a rental increase.
ScottSomething else that occurred to me. If you were to strictly toe the ATO line, there is an argument that anything you do before renting a property out constitutes a ‘cost of aquisition’ and as such is only claimable in that it can increase your cost base upon sale for the calculation of CGT. It’s a bit of a grey area and could be argued, but any argument with the ATO is to be avoided. Best try and save all work possible till after the property has been tenanted for a while (even if it means getting slightly lower rent for 6 months), or get postdated receipts for your accountant – oops, that would be a ‘trick’.
I can give a comment, but no tricks – the ATO are going to be carrying out lots of audits this year and I would advise against trying to be tricky.
It sort of depends on what you’re planning to do and the age of the property . If you’re throwing out carpets, blinds, stove etc, you may be able to claim the residual depreciation on those items when you dispose of them. You could have a schedule done now, keep those items out of the Low Value Pool, and ‘dispose’ of them. Then when you do any new work you’ll have receipts your accountant can work with. You should run this past your accountant.
If you’re doing more of a tart up, I would wait till you’re finished and get a QS in. Bear in mind you won’t be able to claim depreciation on your own labour – that’s one of those tricks the ATO are a wake up to.
Remember also that painting prior to initial letting, for instance, is depreciable at only 2.5%pa. Whereas if painting is carried out as a ‘repair’, it is 100% deductible. Similarly, ripping up carpets and polishing floors can be viewed as a repair. Of course, the place would need to be tenanted for a while before you can legitimately claim for any repairs.
My advice to our clients is to get tenants in (Sugar Soap can work wonders on tired paint) for a while and then after 6 months or so see what they can do as legitimate repairs.
Hope that helps.
ScottI’m seeing my accountant this week as I do every May to work out what I need to do between now and June 30 to improve my tax position. I’ve paid a fair bit of tax this year, so pre-paying some of next year’s interest will be one outcome. And of course I’ll be whipping up some Tax Depreciation Schedules on properties I’ve bought in the last 12 months.
ScottYou’d need to get them seperately metered – water and power, too. And there would be fire issues. I’m also curious to know what;s involved in this sort of exercise as I have a couple of blocks that might be suitable.
I imagine the best way to work out the value of the units when converted to strata title would be to look at comparable properties in the area.
ScottDom, just call the council. My guys get asked this question a dozen times a day – our clients need to furnish us with a construction date so we can do Tax Depreciation Schedules for them. Many councils can answer the question over the phone. Sometimes you have to fax a request. I’d be surprised of they charge you. They will have a building approval date. (Of course, just because a building was approved on a given date it doesn’t mean construction started then.)
ScottI heard from a broker yesterday that some banks are dropping their LVRs for new units in some specific Sydney and Melbourne suburbs to 60%. If it’s true, that’s a sign.
