The changes mentioned in the press last week are in draft form. Word has it they may be announced formally next month. It’s not a change in legislation, more a fiddle with the details. Some items that have previously been regarded as fixtures and fittings will now be lumped in with the building cost. Other items have had their effective lives either increased or decreased. Newish, high rise apartments will be most affected. Claims for investors in these buildings could drop by 10-15%. Every Tax Depreciation Schedule done after the changes lob will have to conform to them. So if you’ve been putting off getting a schedule done till tax time, I reckon you should act a little more quickly.
ScottMy View:
Purchasers of Rental Properties can blow their budget by relying on incorrect depreciation calculations.
Property Owners expecting to receive a large tax refund cheque to help fund the costs of the rental property are quiet often disappointed to find out the information provided by a Developer or Quantity Surveyor is not correct. Mind you it is not an easy task to break down these costs. Light fittings are a typical example. If a light fitting simply hangs off a light globe its cost can be written off over 5 years as plant and equipment but if it is fixed to the ceiling it becomes part of the building. Being caught as part of the building means at best its original cost can be written off over 25 years, normally it is 40 years and in some cases no write off is permitted at all.
The ATO has issued a draft ruling that contains 7 pages of applicable items and dissects them between being part of the building or qualifying as plant and equipment. It also contains recommended life expectancies for items that qualify as plant and equipment. From a tax agents point of view I welcome the clarification.
Property investors have been concerned that the ruling will reduce their tax deductions. But in many cases it provides investors with a better tax deduction than stated in previous rulings. For example it recommends that Stoves and Hot Water Systems be written off over 12 years instead of 20 years previously. It also moves wall ovens out of the building write off and into plant and equipment. There are parts of the draft that contradict case law so I suspect the final ruling will differ. Nevertheless there is not a lot to fear in it. Further the effective lives for plant and equipment are recommendations. If you can justify a different life you are entitled to use it. The discussion paper will only affect items purchased after 1st July, 2004
With Regard to the building write off mentioned above don’t just assume a 2.5% pa 40 year write off There are many ways your property could qualify for 4% write off but as this only allows it to be depreciated over 25 years since construction it may not work in your favour if the building is getting on.
The benefit is in the detail for example.
Residential properties on which construction first commenced after 18th July, 1985 and before 16th September, 1987 are entitled to be depreciated at 4% per annum.
Commercial buildings constructed after 26th February, 1992 will qualify for the 4% depreciation rate if they are “used mainly for certain Industrial activities or amenities or offices for workers and supervisors involved in industrial activities.” The Industrial activities are:
1) The manufacturing of items or storage of manufactured items.
2) Processing of primary products
3) Printing, lithographing and engraving.
4) Preparation of foodstuffs in a factory or brewery.
5) Activities associated with the above such as packaging and cleaning.
On Commercial buildings started before 16th September 1987 and after 21st August, 1984 a write off of 4% pa is allowed. .
Buildings constructed after 26th February, 1992 can be depreciated at 4% if they are used as a motel, hotel, guesthouse or short term traveller accommodation providing there is at least 10 bedrooms or apartments.
The building costs must be determined by the original documentation or a quantity surveyor’s report.
Before you spend money on a quantity surveyor make sure you have exhausted all other means. The ATO will not permit you to use the quantity surveyor’s report for building depreciation if you can ascertain the original cost by other means. The seller of a property is required by law to provide you with the original information. You should also find out if the original owner was a professional builder or owner builder as the building depreciation calculation cannot include his or her labour or profit.References:
Wimpy International v Warland 1989
ID 2002/1015
IT 242
TR 2000/18C5
Subsection 262A (4AJA)
TR 97/25Like tax agents and accountants, most Quantity Surveyors welcome the clarity of the new gudelines. Whenever the ATO make some grey areas a bit more black and white it makes everybody’s job a bit easier. We’ve done some backtesting on recent schedules and found that many investors who buy houses may be better off. As Julia said, always be very wary of ‘depreciation estimates’ provided ny developers – they have a vested interest in making these estimates look attractive.
ScottOriginally posted by depreciator:Like tax agents and accountants, most Quantity Surveyors welcome the clarity of the new gudelines. Whenever the ATO make some grey areas a bit more black and white it makes everybody’s job a bit easier.
DOesn’t it also mean more work – for anyone who needs to come back to have a revised survey….and for people who were unaware that they could claim depreciation
Cheers,
Aceyducey
Disreputable providers of Tax Depreciation Schedules may try to tell people that past schedules need to be revised. The ATO has clarified the fact that the new rules will apply to properties purchased after July 1 this year, which should make alot of people breath easier. There will still be some confusion this tax season – I called the ATO on Friday to ask a question about the impending changes and the person I spoke to didn’t know what I was talking about.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
