BMT / Depreciation and The Block

[Paul@PFI]

Last night on The Block, Darren & Dee had Brad Beer of BMT in to arrange a QS report for their apartment. Good to see Brad has been posting here in recent times. I find Brad (and others) very helpful on these valuable deductions and always seem to find technical issues that need to be addressed. Smart marketing move really to ensure that prospective buyers include investors and deductions are maxed.

But it gave rise to many questions and I question if their strategy may mislead buyers into thinking deductions may actually be lower than could otherwise become available. Let me explain and I hope Brad and his colleagues views are shared in this thread.

My first question is about cost. The cost of these builds is vastly lower than an arms length DIY build. Darren and Dee aren't being paid for their significant labour element. So what "cost" would BMT use here ?? Many of the common area costs are obviously OK but within each apartment the cost of the build is vastly under estimated by the use of the contestants free time.

Q : If I obtained a QS report from BMT after successfully bidding at auction I believe that the QS estimate would be far higher than the costs used where they are known - ie Lang Constructions costs. Is this correct ? However where the actual costs are known then the QS report must use actual costs. So what happens here ?

Q : If suppliers gift items or heavily discount them then isn't the COST now affected ? If so, why then cant a owner builder include a reasonable allowance for own labour ? Why can Darren & Dee ??

Q : We have seen some contestants negotiate lower tradie costs than a typical builder. How may this impact a QS report if actual costs have been discounted in such a manner.

What are some of the QS strategies here ?

 

[BMT Tax Depreciation]

My first question is about cost. The cost of these builds is vastly lower than an arms length DIY build. Darren and Dee aren't being paid for their significant labour element. So what "cost" would BMT use here ?? Many of the common area costs are obviously OK but within each apartment the cost of the build is vastly under estimated by the use of the contestants free time.

Good thinking, Paul, and this is an issue we face all the time.

Q : If I obtained a QS report from BMT after successfully bidding at auction I believe that the QS estimate would be far higher than the costs used where they are known - ie Lang Constructions costs. Is this correct ? However where the actual costs are known then the QS report must use actual costs. So what happens here ?

Yes, you are correct in this belief. Where the actual costs are unknown we are qualified to estimate them. Where they are known, we need to use them, or at least make sure a client knows they should be supplied and make reasonable attempts to acquire them from the client.

Q : If suppliers gift items or heavily discount them then isn't the COST now affected ? If so, why then cant a owner builder include a reasonable allowance for own labour ? Why can Darren & Dee ??

Correct: the cost is affected and, if the cost is known or if it's known that it's a gift, we have to use that cost and we can't claim a "free" item. If it was a gift but included in the total purchase price of the property then we can apportion value to it.

You can't include the labour costs for your own work as it's intangible (what's a reasonable labour cost? Unfortunately you can't put a value on your own time), whereas if you pay someone else then there's documentation of that cost.

Can you clarify what you meant about Darren and Dee being able to claim for their labour? That wasn't stated on the show.

Q : We have seen some contestants negotiate lower tradie costs than a typical builder. How may this impact a QS report if actual costs have been discounted in such a manner.

Again, actual costs must be used. Claiming deductions on money that wasn't spent in the first place isn't really cricket!

What are some of the QS strategies here ?

While our goal is to maximise deductions, we also have to play by the rules. However, the client is the one who is responsible for the information provided (even though we always take reasonable steps to acquire it). We have to (and can only) use the costs we're provided with.

I hope that clears things up but please let me know if you need clarification.

Chris

 

[coastymike]

Raises an interesting question paul. Would in fact these developments be bad from a tax perspective for depreciation purposes. If you purchased a similar "non block" property which didnt use a free labour component your depreciation would be higher as that would include a labour component. Prices would be similar if built nearby as that is the market demand for that area. But depreciation benefits could be significantly different. Interesting.

 

[Paul@PFI]

So - If I were to buy the unit. I might engage another QS firm to redo the schedule without any known costs and they might assess the "value" of their work performed rather than its cost. Has to be much higher. Several hundred thousands per unit perhaps.

Or perhaps the D&D schedule would have been better off completed by the new owner after all construct is ended and when Lang Constructions tells the QS who enquires about costs to go jump when they ask about costs. Hopefully the say its commercially in confidence. Oh dear then the QS must use estimated costs... so the value of discounted quotes, sponsored freebies and free labour by contestants is avoided...

Makes a mockery of doing a QS report now really. The benefit is lower than if the owner did it themselves later. Has to be. Many of the discount depn issues seen to weight heavily on F&F too with free vouchers for lighting, kitchens even incl appliances.

Obviously a TV show but a good example of how the word "cost" can be played with...A good example of situation when an old QS report finds a shredder.

 

[WashingtonBrown]

Makes a mockery of doing a QS report now really. The benefit is lower than if the owner did it themselves later. Has to be. Many of the discount depn issues seen to weight heavily on F&F too with free vouchers for lighting, kitchens even incl appliances.

Obviously a TV show but a good example of how the word "cost" can be played with...A good example of situation when an old QS report finds a shredder.

Firstly, its good to see shows like the block highlighting depreciation..

But your comment worries me about the mockery of the QS report...and the for the future of the QS industry.

You see...

Paragraph 23 of TR 97 / 25 states the following.

"23. Subsection 262A(4AJA) of the 1936 Act operates upon a disposal, by way of transfer, of capital works begun after 26 February 1992 and in respect of which deductions have been allowed or are allowable under Divisions 10C or 10D of the 1936 Act or Division 43 of the new Act. Broadly stated, it requires the transferor to provide the transferee with information that enables the latter to determine any entitlement under Division 43."

So technically the original vendor knows the actual build cost and then the section 43 allowance is suppose to transfer from vendor to purchaser down the line.

This put the onus on the vendor to provide the actual costs ? thus putting liability on the vendor to produce accurate estimates when marketing the property.


I hope for the QS industry that the vendors are aware of their obligation.

Tyron

 

[Paul@PFI]

I understand that provision however the ATO practice recognises that this isn't reality. Few vendors know their costs. Especially in strata situations. Time erodes records, memory and knowledge. Construction companies go bust, people forget, die and lose things.

The Block contestants wouldn't know what the costs are. Arguably nobody else involved in this project other than as a acquisition, construct budget, sponsor and materials input etc... I think the QS report they are preparing may be a poor tax strategy for an investor.

ITAA36 262A (4AJA) doesn't operate in this case. Its a common mistake that everyone assumes all depreciation schedules must transfer. Sub section b refers to a circumstance where a deduction HAS been claimed....The obligation isn't there is none has been claimed. This arises most commonly where the property has been owner occupied. In this case the property is new so normally you wouldn't bother with a new schedule. But if the cost is artificially low I think I might bother. And Lang Constructions is not required to share their cost information with the new owner and I might suspect its commercially in confidence anyway.

?

 

[WashingtonBrown]

I disagree - I'm unsure the ATO accepts that a building just finished can be estimated.

The obligation is from the outset...if it doesn't start right - it never will be right!

Yes where the builder goes broke an estimate can be used - as per 97/25.

I suspect in this case the vendors are not the contestants but a subsiduary of channel 9 - who have full access to the actual costs.

 

[Paul@PFI]

I'm with you on the just finished issue but again don't believe there is any compulsion to use those original costs. I suspect that the contracting owner (A production company) has commercial in confidence issue and wont hand over costs info to a buyer. And in any case there is no compulsion in tax law to do so anyway so that there is no obligation upon the buyer to pursue it where its a known new build and first available for occupancy. This lack of obligation means an estimate may be available as the other option.

Now I know normally nobody would seek a second report. When BMT / WB / Deppro etc do a apartment build report its thorough and arguably complete with all costs as you work with the builder and know what the cost is. Nobody would bother with a second opinion as your report is very detailed. The issue here is about undervalued costs that can only be considered if the report is not used.

So isn't an estimate now the only other buyer option ? p16 and p24 of the Tax Ruling say as much.

It might have limited application of course. eg The Block. What about if an owner occupier has a large scale reno done by a TV show and later move out and rent it? Or a builder goes broke during build and hasn't paid for large elements of the build....?

One of my tax mentors taught me to ask "why" and not accept the accepted. I'm not trying to criticise and value your expertise in this area has more depth than mine in QS applications. But as a tax practitioner in this area I believe there is a tax opportunity here. Tax law doesn't address this. Call it a loophole or gap . I'm willing to stand corrected.

 

[danwatto]

This has got to raise the question would anyone buy multiple depreciation reports that are based upon estimates, in order to choose the largest one for their tax deductions?

And would the additional money spent on the reports be worth the difference in estimates?

Makes sense if believe one report is undervaluing, but in other cases could this be seen as tax avoidance?

 

[Paul@PFI]

Its not Part IVA to seek to maximise a legit deduction by following the statutory rule of law.

Nobody would normally buy multiple reports - Waste of $$$ I agree. However strange but true it actually happens all the time. In my office one of the staff purchased a apartment and lived there. Now rented I advised him to get a QS report, He went to a cheap QS firm. I found out all the construction estimates were already done by BMT for builder marketing etc and the reports were already done subject to specific internal fitout completion but he didn't know...Cost $250 v's $700+ for the other firm. He nearly fell for the mistake of getting a fresh report when it was already there.

In my question I'm asking about where the cost isn't inclusive of all costs based on an arms length basis ie unreality television where labour is free or discounted and sponsors have gifted items for promotion.

I suspect there are many instances when a "cost" isn't fully reflective of true construction cost and it can work both ways. For example buyers of Sydney cross-city tunnel. Construction cost $1.2b liquidators sold it for $700m. Half finished construction completed by another builder etc...

 

[Deltaberry]

Depreciate as much as you can. Don't let your money go towards do nothing people in society

 

[danwatto]

Was reading one of the Kogtevs books, she was saying a client didn't like the detail in one report so purchased a second and found the difference in claims was in the thousands.. I didn't expect that.

 

[WashingtonBrown]

Go for it!

Where the costs are unknown....I encourage you all to get a report from...

Washington Brown, BMT, Deppro, Depreciator & Napiers..

hehehehe

Remember all our fees are deductible and we all guarantee our results!!

 

[Paul@PFI]

Where the costs are unknown....I encourage you all to get a report from...

Washington Brown, BMT, Deppro, Depreciator & Napiers..

hehehehe

Remember all our fees are deductible and we all guarantee our results!!

For all multi level apartments bought on market later on I also recommend clients call each of those same firms FIRST and ask if they did the original builders estimates for them. It may mean 80%+ of the effort is known and a cost saving is available. They would then need just interior fit-out details. I have encountered this a few times and saved clients a bit. One they had completed QS reports and the builder hadn't handed them out to buyers. Cost was free for that one.