All types of income producing properties have substantial taxation benefits available to be claimed as a tax credit. Many property investors are missing out on thousands of dollars in tax depreciation deductions. Both new and old properties will attract some depreciation benefit that the owner is able to claim as a tax credit. A common myth is that older properties will attract no claim. Therefore it is worth making an enquiry about any property. When a property owner has not been claiming deductions for tax depreciation, previous financial years tax returns can be amended. The Australian Taxation Office (ATO) allows for up to the previous four year returns to be amended, in some instances the ATO may have to pay you money back!
The maximisation of a depreciation claim on any building requires a combination of construction costing skills and an excellent knowledge of Tax Legislation. This rare combination of skills has resulted in a select number of quantity surveying firm specialising in property depreciation.
Quantity surveyors are recognised by the Australian Taxation Office to be appropriately qualified to estimate building costs for the purpose of depreciation.
Your accountant should recommend a specialist to complete such a report, to maximise the depreciation benefits from your property.
Are You Maximising Tax Depreciation and Capital Allowance?
April 28th, 2008 · No Comments
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Tax Depreciation: An Investor Profile
April 27th, 2008 · No Comments
The depreciation benefit to every investor will vary. The following example has been provided as an approximate guide, using the diminishing value of depreciation.
Property:
A two bedroom unit purchased for $400,000
Income:
Rented for $385 per week
Total income of approximately $20,000 per year
Expenses:
Interest, rates and management expenses $32,000 per year
Scenario 1 – No depreciation claim:
Pre tax cash flow
Taxation loss $12,000 = $230 per week
Post tax cash flow (top tax rate of 45%)
Tax refund $5,400
Net cash outlay $6,600 = $126 per week
Scenario 2 – With depreciation claim:
Pre tax cash flow
Tax depreciation $12,000
Cash flow position -$12,000
Total deduction $24,000
Post tax cash flow (top tax rate of 45%)
Tax refund $10,800
Net cash outlay $1,200 = $23 per week
This investor has over $100 extra a week by obtaining a depreciation report.
This demonstrates the after tax effect of applying property depreciation. The property investor in this situation has a bottom line benefit of $5,400 per annum. The benefit isthe difference between the $6,600 cost before depreciation is applied, and the$1,200 cost once depreciation is applied.
This profile emphasises the benefit of depreciation. The property investor has made this saving from the same property that has moments ago cost $6,600 for the sameperiod.
Article Provided by BMT & ASSOC Pty Ltd.
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Top Ten Tax Depreciation Tips
April 26th, 2008 · No Comments
1. If my property was built before 1985, is it too old?
No. It is worth noting that:
? Your investment property does not have to be new: Both new and old properties will attract some depreciation deductions. A common myth is that older properties will attract no claim.
? You can adjust previous year’s tax returns: When a property owner has not been claiming or maximising tax depreciation deductions, the previous four financial year’s tax returns can generally be adjusted and amended. Please note, the adjustment period was recently amended to become a 2 year period.
? Note: if the deductions are not high enough to make it feasible to complete a report, we will not proceed.
2. Why is plant and equipment itemised?
The ATO specifies an individual effective life for each plant and equipment item. Consequently, our reports show the estimated cost for each item and its contribution to the depreciation total per financial year. The original building structure and capital improvements, or Division 43, are all written off at the same rate (unless building works have been completed over different legislation periods). Therefore individual costs for these items aren’t expressed in the report. If required by the ATO, the estimates for Division 43 can be justified.
3. Why does the depreciation and capital allowance schedule only last 40 years?
From the date of construction completion, the ATO has determined that any building eligible to claim the building write-off allowance has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years depreciation on a brand new building, whereas the balance of the 40 year period from construction completion is claimable on an older property.
4. Can I claim renovations completed by the previous owner?
Yes. Anything in the property that is part of a previous renovation will be estimated by our quantity surveyors and deductions calculated accordingly. This includes items that are not obvious e.g. new plumbing, water proofing, electrical wiring etc. For capital improvements to qualify for the Division 43 building write-off allowance, they must have commenced construction within the appropriate Division 43 time periods.
5. What information do I need to provide?
To produce a Tax Depreciation and Capital Allowance report, you will need:
? Date of settlement
? Purchase price
? Access details for inspection (E.g. property manager or tenant details)
? Any information pertaining to improvements or additions made to the property including dates and actual costs (where available)
? The date the property became available for income producing purposes.
6. What is the difference between plant and equipment and the building writeoff allowance?
Plant and equipment items are items that can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items also include items that are mechanically or electronically operated, even though they can be fixed to the structure of the building. Plant and equipment items include (but are not limited to):
? Hot Water Systems
? Carpets
? Blinds
? Ovens
? Cooktops
? Rangehoods
? Garage Door Motors
? Door Closers
? Freestanding Furniture
? Air Conditioning Systems
The building write-off allowance (otherwise known as Division 43) is based on historical building costs and includes things such as the bricks, mortar, walls, flooring and wiring.
7. Who is qualified to estimate construction costs for depreciation purposes?
Quantity Surveyors are one of the few professionals recognised by the ATO to have the appropriate construction costing skills to calculate the construction cost for the purposes of building depreciation.
8. What is pooling?
A low value pool exists providing investors the benefit of pooling items that meet either of the
following classifications:
Low Cost Pool - A low cost asset is a depreciable asset that has a cost of less than $1000 in the year of acquisition.
Low Value Pool - A low value asset is a depreciable asset that has an undeducted value of less than $1000. That is, the cost of an asset is greater than $1000 in the year of acquisition but the value remaining after depreciating over time (opening value less deductions in year 1 less deductions in year 2 etc) is now less than $1000. Assets meeting both these classifications can be placed in an itemised pool. Pooling is used in conjunction with the diminishing value method to maximise deductions in the initial years of the depreciation schedule.
9. How do you work out how old the building is?
The age of the building can be determined by obtaining council documents with dates pertaining to the original application approval date or the Occupancy Certificate date and final inspection date. Similar methods are used Australia wide, however some properties are privately certified. Your quantity surveyor will conduct the relevant searches required to accurately determine the age of a building. These include historical council searches regarding lodged development applications, as well as Occupancy certificates and certified final inspections.
10. What does a BMT & ASSOC tax report contain?
A detailed 22 page schedule includes the following components:
? A method statement;
? Schedule of Diminishing Value Method of Depreciation;
? Schedule of Prime Cost Method of Depreciation;
? Schedule of pooled items for the property;
? Lists all Division 43 (10C & 10D) allowances available from the property;
? Detailed 40 year forecast table illustrating all depreciable items together with building write off for both Prime Cost and Diminishing Value methods;
? Comparative table of the two methods of depreciation;
? Common property items within strata or community title complexes such as lifts and swimmingpools are included in the depreciation report for a unit in a multi-unit development ;
? The report is structured to facilitate the client to be able to amend previous years’ returns to recoup unclaimed depreciation benefits; and
? The report is pro-rata calculated for the first year of ownership based on the settlement date so that the accountant has the exact depreciation deductions for each year. The report will ensure maximum depreciable items are identified and will take into account the pooling of low cost and low value items. It is valid for the life of the property, until capital improvements are undertaken or ownership changes.
Article Provided by BMT & ASSOC Pty Ltd.
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Buying At Auction
April 19th, 2008 · 3 Comments
There is a lot of confusion regarding auctions, why it is different to a normal sale, what the terms mean, what conditions need to be met and just exactly what “vendor bidding” is versus “dummy bidding”, and why one is illegal and the other isn’t (guess which!), so here’s a quick overview of the laws in Queensland and what some of the lingo really means.
As a disclaimer, in Queensland, Real Estate Agents are governed by the PAMDA (property agents and motor dealers act), which is where this information comes from.
So, what is an Auction?
An Auction is a process of buying and selling goods by offering them up for bid, taking bids, and then selling the item to the winning bidder.
Essentially, A property is marketed for a number of weeks (usually 4), after which all interested parties come together to put forward offers in a public forum, overseen by the Auctioneer.
Because all bids are made publicly, and buyers can see who they are bidding against, auctions are the best way to determine fair market value. It is the fairest process for both buyers and sellers.
2. How can I buy at Auction?
If you have found a property that you meets your requirements, there are simple steps to take to ensure you will be able to buy at Auction.
1. Ensure your finance is in order. Speak to your bank or broker and find out exactly how much you can borrow. In other words, know your limit.
2. Do your research – visit other Auctions, open homes and scour the papers and internet to see what properties are selling for.
3. Build a relationship with the Lead Agent, the one who’s name is on the sign.
4. Register for phone bidding if you aren’t able to attend the auction, or register to bid on the day (in person)
5. Bid confidently, bid strongly, and don’t be intimidated by other bidders. Don’t go beyond your upper limit.
Easy!
3. What are Auction Terms?
If you decide to buy or sell a property at auction, generally the property will be offered for sale to the highest bidder.
If you buy or sell at Auction, the property will usually be offered for sale to the highest bidder. If your bid is accepted then you will be legally bound to sign an unconditional contract immediately.
As a general rule of thumb, 10% deposit will be expected upon signing with 30 days for settlement to occur. If you need a variation to these terms you simply explain it to the auctioneer or agent when registering and if the auctioneer accepts you will be allowed to bid under those terms.
What happens at the time of Auction?
There are a number of possible outcomes at an auction:
Should the bidding reach or exceed the reserve price, the property is sold to the highest bidding and the auctioneer will conclude a binding contract between the buyer and seller. The Auctioneer may sign the contract on behalf of either or both parties if instructed to do so.
If the highest bid falls just short of the reserve price the auctioneer will asks for the sellers instructions before passing the property in, this gives the vendor opportunity to accept the last bid, by “placing it on the market” so that it may be sold under the hammer. This can often encourage further bidding.
If the highest bid doesn’t reach the reserve price (and this can be a vendors bid) The property is placed on the market for sale by private treaty, at which time anyone may negotiate with the listing agent.
What happens after Auction?
If you are the highest bidder, above the reserve price, you will immediately sign the unconditional contract.
If the property was passed in (ie. Didn’t achieve the reserve price), you will have an opportunity to put in an offer, to which the vendor will be able to accept or decline depending on the conditions and price. When a property is passed in a good agent will contact all interested parties to enquire if they would like to make an offer.
Remember that when an offer is passed in at auction, this means that the vendor is expecting an offer above the price that it was passed in at.
What is dummy bidding and how is it different to vendor bidding?
Dummy Bidding is a term used to describe when a stupid person bids… no really, it is! A dummy bidder is one who bids with no intention of buying, to push the price up on behalf of the vendor. In QLD all bidders need to register, and the Auctioneer may bid on the vendors behalf, which is very different to dummy bidding.
For example, a homeowner wants to achieve $350,000 for their property, so that is their reserve price. The bidding stalls at $295,000 and there appears to be no action. So the Auctioneer acting on behalf of the vendors would vendor bid for say, $300,000. This must be declared as a vendor bid (they often say “with me at 300”). This means that the vendor is effectively “buying back” the property at $300,000.
This states very clearly that the vendor is not interested in selling below that amount. By listening to the vendor bids, you can reasonably judge where the reserve has been set, because once reserve has been met, the auctioneer can no longer bid on the vendors behalf.
What the Fair Trading Minister, Margaret Keech has to say…
“One of the requirements for all auctioneers, is to only accept bids from registered bidders who have been given a numbered card or other similar device, such as a numbered disc or baton to identify them as registered bidders,”
“However, this rule does not exclude late-coming potential buyers from bidding. If bidders arrive late, auctioneers have the option to either:
- pause the auction, register the late bidders, and continue the auction; or
- continue the auction and not recognise the late bidder.
“To assist the process, auctioneers can pre-register bidders before the auction and then allocate a bidding number before the auction commences.
“Pre-registration is especially useful for those who may be travelling long distances or bidding via telephone.
“Auctioneers should remember if vendors intend to bid, they also have to register.
“Auctioneers must identify any vendor bids, including any bids made by the auctioneer on behalf of the vendor.
“Vendor bids cannot be accepted after the reserve price has been reached, whether the bid is made by the vendor or on behalf of the vendor.