A Question on Depreciation

[ralph wiggum]

Hey guys. Hoping someone can give me some advice on depreciation.
Purchased a unit last year in Jan, and had a dep. sched. done on it. The unit was fully furnished, and the depreciation people told me that they could add the furniture onto their report, but it would cost an extra $150 (i think) OR they said that if I had the receipts, that my accountant could easily incorporate the furniture when he does my tax return.
The vendor had supplied me with the receipts, so I decided to let my accountant do it.
So, when I was having my 2003-2004 tax return done, my accountant stated that he didn't think that the furniture was able to be depreciated as it was included in the purchase price. He said he would check for me, but I haven't heard back.
I would have thought that, like the fittings, the furniture would be given a new value and would depreciate at it's designated rate.
This was my first fully furnished purchase, so am unclear on the specifics regarding depreciation of the furniture.
Any advice would be appreciated.
Thanks

 

[geoffw]

I suspect you need a new accountant.

I think you can claim all furniture and fittings, starting from their written down value. That's what I've been doing in units I've purchased.

 

[see_change]

Hey guys. Hoping someone can give me some advice on depreciation.
Purchased a unit last year in Jan, and had a dep. sched. done on it. The unit was fully furnished, and the depreciation people told me that they could add the furniture onto their report, but it would cost an extra $150 (i think) OR they said that if I had the receipts, that my accountant could easily incorporate the furniture when he does my tax return.
The vendor had supplied me with the receipts, so I decided to let my accountant do it.
So, when I was having my 2003-2004 tax return done, my accountant stated that he didn't think that the furniture was able to be depreciated as it was included in the purchase price. He said he would check for me, but I haven't heard back.
I would have thought that, like the fittings, the furniture would be given a new value and would depreciate at it's designated rate.
This was my first fully furnished purchase, so am unclear on the specifics regarding depreciation of the furniture.
Any advice would be appreciated.
Thanks

The furniture would be considered to be included in the purchase price , but that doesn't stop you being able to depreciate it. From the reciepts that the Vendor gave you , you can ( or your accountant can ) work out what the residual value of the furniture was at the time of the purchase and then from the depreciation point of view , that part of the purchase price is considered to be allocated to the furniture and the rest of the purchase price is he value of the property and the other depreciable assets ( fittings , carpets etc ) that your depreciation schedule documented.


You can down load the ATO guides to depreciable assets , the Captial gains guide and the guide for Rental properties if you want a bit of light reading.


See Change ( btw , I'm not an accountant , so don't rely on this info , but it gives you somewhere to start looking )

 

[ralph wiggum]

Ok thanks guys. That's what I was thinking. Maybe I should look at finding a more property savy accountant.
Cheers

 

[geoffw]

Ok thanks guys. That's what I was thinking. Maybe I should look at finding a more property savy accountant.

DaleGG

Even if you're not based in Melbourne, it's well worth having somebody who knows property very well.

 

[depreciator]

There is good depreciation in furniture. Many items are under $300 in value and just about everything else goes straight into the Low Value Pool. Having said that, it's tricky because QSs aren't really qualified to value furniture and many aren't keen on doing it. That's why many will request a costed list.
The main potential problem lies with older furniture. Newish furniture packages are relatively easy to value, but let's say a holiday home is full of older furniture. A QS may look at a 40 year old coffee table and value it at $60 without realising it is a '1960s classic' worth ten times that. You can imagine how messy it can get.

Ralph, I know you mentioned that your property was purchased in January 04. Be aware everyone that if you bought a property post July 1 04 and you have a depreciation schedule that includes light fittings as an asset, the schedule won't pass ATO scrutiny. Of course, there are lots of other things that shouldn't be in there, but light fittings is one they'll be looking at in particular this tax season.

Scott

 

[ralph wiggum]

Thanks depreciator
Shouldn't the QSs know this ruling, and leave the light fittings etc out of the dep. report?
Cheers

 

[depreciator]

Yep, the QS should know, but many don't.
At this time of year, many QSs turn their hands to tax work because the work is there. Remember, this sort of work represents a small part of what the average QS does, so they don't keep up with the rule changes.
I know exactly how the ATO review a Tax Depreciation Schedule. It takes about 30 seconds to spot a dud one.
They look at the list of Depreciating Assets (sometimes called Fixtures and Fittings or Plant items). If the property was purchased after July 1 last year and light fittings are there, it's a dud.
Other things that shouldn't be there include: distribution gear, telephone installation, TV aerial. There are amazingly still schedules being done with kitchen cupboards and built-in wardrobes listed as Assets. They're real duds.
If the ATO find something that shouldn't be there, they'll role up there sleeves. It doesn't mean there's going to be an audit, but there are going to be questions, and nobody wants that. The ATO aren't going to question the QS, either. The taxpayer is the ATO's client. If a taxpayer commissions a schedule and uses it, they accept initial responsibility for its accuracy.
The ATO have also said that this year they are going to be looking at construction cost estimates for the first time. I'd say they will be looking mainly at how the estimate has been arrived at i.e. did a QS visit the site and did that QS prepare the estimate.
Scott

 

[ralph wiggum]

So if I had a "dud" dep. report done by my QS, unknown to me, are you saying that they take no responsibility for the report? That sounds a bit harsh, considering we pay professionals to do a job that we aren't qualified to do ourselves. I would have thought that they would have to stand by their decisions, and face the music if that got it wrong.
It's good to know depreciator. Thanks for the heads up.

 

[Aceyducey]

Ralph,

No professional worth their salt takes responsiblity for anything!

Cheers,

Aceyducey

 

[the.j]

Profeshunal indemnity

AD,

Can't you sue for a pair of pants by not providing competant advice, that as a QS, should reasonably be expected to know?

 

[depreciator]

Any reasonable size QS group would naturally assist with any ATO questions. Sole practitioners who do tax work sporadically can end up out of their depth when the ATO start asking questions. Sometimes the service you get after your job is done is more critical than the service during the job.

The point is, you are the ATO's client, not the QS. So when the ATO has questions, you are the one they ask. Then you contact the QS. And your sense of urgency will be greater than theirs. The QS's response would go via you (or your accountant) to the ATO. I just think it's better to avoid the possibility of having to do this if possible. And the best way to avoid it is to use a QS company that only does tax work, as opposed to using the cheapest QS available. (Yes, I do keep santimoniously banging that drum.)

We incidentally had our first ever ATO query late last year. And we do thousands, and thousands of schedules per year. The ATO asked the client two questions. The first concerned the manner in which the construction cost estimate was arrived at. The second concerned light fittings.

I had a letter for the ATO back to the client within 2 hours referencing ATO directives. That was the last I heard about it till an e-mail arrived some weeks later from the client. I kept it because it's a better testimonial than we could have written ourselves.

Warning: Shameless promotion follows:


I write to thank you for your assistance in my recent dealings with the ATO regarding my claim for Depreciable Assets.

I am pleased to advise that the ATO has accepted in full the schedule prepared by Depreciator and accepted my request for an amendment for the 2000/01, 2001/02 and 2002/03 financial years. They also allowed my objection to their initial rejection for the 1999/2000 financial year. The best $715 (tax deductible) I have ever spent.

Once again, thank you for assistance in this matter - I have, and will continue to recommend Depreciator and it's services to my friends and colleagues.

 

[COOPS]

DEPRECIATION SCHEDULES & UPDATES

We originally had our depreciation schedules handled by DEPpro (www.deppro.com) and were happy with their work. Now, after looking up the new ATO legislation on depreciation, we needed updates done and found they have an online service under the banner of TAXUPDATE. After faxing them our original depreciation schedules they have emailed me updated schedules to comply with the new laws for the reasonable sum of $79.95 within 48hours. Very professional and, although the new law is quite simple to understand, I feel more confident having the work done by them than trying to do it myself. Money well spent and I have them ready for June30 this year. The web address is www.taxupdate.com.au

They also do online depreciation schedules by your filling in a checklist - www.taxshield.com.au

Paul Bennion who is associated with these companies is very well respected in his field so I am happy to recommend them.

 

[HeirConditioner]

I've also used TaxUpdate and it was easy and quick. I felt it was best to get it out of the way now rather than wait till I get the tap on the shoulder from the ATO.

Next time I buy a property I'll be using the TaxShield, as it's quite appealing to be able to do my depreciation so quickly, online.

I agree, Paul Bennion does seem to know his stuff. But he's always busy and very difficult to get a hold of!

 

[depreciator]

When the ATO released the Effective Lives review last July, there was no mention of any expectation that existing schedules be amended. The new lives applied to Assets and properties purchased after July 1, 04. Yes, they clarified a few other things and moved some items into the building category. Can you imagine the uproar if there was an expectation that all existing schedules be changed? There are literally hundreds of thousands of them out there.

We made a point when the changes were released of telling our clients they were okay. Washington Brown and BMT did this, too. Tempting as it is, we don't believe we should profit from confusion and misinformation.

As for obtaining a Tax Depreciation Schedule on-line, Coops you wrote in a previous post:

'No way would I use a QS who doesn't undertake an inspection'

You seem to have changed your tune. The AIQS (Australian Institute of Quantity Surveyors) advocate inspection by a QS as 'best practice'. No surprises there. The AIQS are in contact with the ATO over this issue and I have no doubt the ATO agree. Remember, the ATO have said that this is the first tax season when they intend to audit construction cost estimates. One question would be: 'How was the estimate arrived at?'

Scott

 

[COOPS]

Yes, depreciator I did write that - 2 years ago !!!!!!

DEPPRO did do site visits before preparing my schedules back then and still offer that service, however I used www.taxupdate.com.au to have those same schedules updated in light of the clarifications being introduced by the ATO. They did those updates using the original schedules which I faxed to them and then they emailed the new ones back to me. There was no need for another site visit and I found the new schedules very easy to understand as they list individual values in the plant (such as carpet, hot water system and oven) and low value pool (such as rangehood and exhaust fans) as well as giving me a summary for the entire 40 year life of the claims.

Yes, I commented that there is an online service for depreciation schedules and I have just used it for 2 simple average rental properties. As the law regarding what you can and cannot claim is so clearly defined now I felt comfortable changing my thinking on this, although if I had a more complex upmarket property I would certainly have a site visit to make sure I had not missed anything. Actually, now that there are very few grey areas left I could have come close to completing a schedule myself but felt that a professionally prepared one was the best option as obtaining all the values would have cost me more in time and money than I paid to have them done.

 

[depreciator]

Coops, the point I was making was that there has been no statement from the ATO that existing schedules need to be updated in light of the recent changes. As I said, given there are hundreds of thousands of them out there I don't think they'd be game. If they did say all previous schedules needed to be changed, we would have notified all our clients and alerted them. BMT and Washington Brown would have done likewise. As it was, we told our clients all was well.

Of course, if a client particularly wanted to update their schedule despite our assurances, we would do it.

An on-line service concerns the AIQS. And the AIQS may have by now voiced their concerns to the ATO. If it's only Assets (stove, carpet etc) that are being valued on-line, that's fine. As you alluded to, under the Self Assessment rules you can be reasonably comfortable valuing these things yourself. And yes, the removal of many 'grey' areas has been great for all concerned. Valuing construction costs is an entirely different matter, though. I'm assuming the two properties you are referring to are pre 85 built and unrenovated.

Interestingly, I had a call from the ATO this week. The last call I had from them was in November last year. He had one of our schedules in front of him, so obviously the client was being looked at closely. The schedule related to a property in Sydney. It was a 100 year old building that had been turned into apartments in 1995. The ATO particularly wanted to know how the construction estimate was arrived at - and they were pretty probing. The November call also concerned the building cost estimate. The ATO are watching.

Scott