Hello everyone,
Just a quick introduction.I"ve been following the forums for a few months now and have found the financial and taxation side of the industry very interesting.I'm a tradesman bricklayer and entered the building industry in 1968 (a couple of months before my 15th birthday)as an apprentice.I also became a licenced builder sometime later and built and sold on the ocassional "spec" home to supplement my income. I invariably paid lots of tax (and associated selling costs) in the years that I constructed a spec home and sometimes wondered if I would ever get ahead.But,as is the case when you stick at things,you gradually do.Now for my questions (sorry if they have been covered before) They are probably very basic as is my understanding of property finance and taxation.
As I've read the various topics on here I've become interested in the subject of depreciation and the benefits of it.I'm thinking about it on two counts.The first one involves an investment property that I built in 1995 and hung onto mainly for somewhere for my kids to stay when they were in between houses etc.(one is in there now)It is still treated as a normal investment though, just with discounted rent.As I have become a bit more interested in taxation etc,I asked our accountant the other day what method of depreciation they were using on the property and he said that they haven't for the last 10 years as they thought it was hardly worth it and would affect the capitol gains tax when I eventually sold the place.The house cost me $75,000 to build and the land was $40,000 so all up $115,000.It is now worth approx $320,000.I have no plans to sell it and just wondered if I should be doing things differently or is it a bit late to worry about it?
The second thing that I was wondering about is that we have two three bedroom townhouses nearing completion at the moment and are not too confident about selling them quickly.If we have to rent the properties out could there be any associated problems with that?(GST inputs etc) that we claimed during the building process?The properties have been listed with an agent but have not been marketed yet.
The last thing I was wondering was about the depreciation thing again.Do you think we should get a depreciation schedule done as part of the marketing or just give an estimate and if it turns out to be an investor interested get one done then or let them do it themselves?
Thanks in advance
Regards Terry
Hi Terry,
Question 1:
In brief.. it’s complicated. Usually where you have a depreciation schedule prepared, to get the maximum advantage in the short term you would use a diminishing value method. In the case of your property, that time has passed. However you can still claim 2.5% of the cost of the capital works every year, for the first 40 years of the life of the building. You don’t need a depreciation schedule prepared to in order to claim it, provided you can accurately substantiate the construction cost yourself. Doing so would allow you to claim a tax deduction of $75000 x 2.5% = $1875 every year.Your accountant is correct in that claiming the capital works depreciation means you pay more in CGT, but many accountants don’t realise that the total benefit (nearly) always works to your advantage, because of the interaction of the 50% discount.
For example, if you sold today, then your net capital gain would be worked out as:
( Sale Value – Cost ) x discount = (320000 – 115000) x 50% = 102,500
For the sake of simplicity.. lets just calculate the tax at a flat 30%.. so you’d be looking at $30,750 in tax on that gain.Now, if you had claimed 1 years worth of depreciation along the way, your gain would be calculated as:
( Sale Value – (Cost – Dereciation)) x discount = (320000 – (115000 – 1875)) x 50% = $103,437
So.. @ 30% tax that would be $31,031 in tax on that gain. But… in the year you claimed the depreciation you would’ve gotten a tax advantage of $562. So all things considered your in front by $281 because you claimed that 1 years depreciation.Finally.. to really complicate things, as you know you pay a higher rate where your taxable income is higher (like when you sell a property). So if you did the above calculation where your Taxable income from year to year is, say, $20,000 and then you sell the property and declare a ~$100k net gain, you may not end up with an advantage. So like I said.. there’s “nearly” always an advantage – It needs to be considered every year.
Admittedly after all that $281 a year doesn’t sound like much does it. heheh.
Question 2:
I’d have to read up to give you a really good answer. But the basic idea is that where you’ve claimed GST credits during construction, you adjust your BAS by one fifth of the GST you claimed, for every year the property is rented.So if you claimed $20k during construction, then every three months the property is rented you have to pay back $1000. The idea being that after 5 years, you would have paid back all the gst you claimed, and the property would be ‘input taxed’.
There’s a special ‘adjustments’ section on the BAS for doing exactly that. (I think?!)
Question 3:
Personal choice but I wouldn’t bother. Investors know it’s a fairly simple thing to organise, and an owner-occupier wont care.Hello Mr5o1,
Thanks very much for your very informative and interesting answer.
Regards
Terry
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