Depreciation and Sale of IP

[wealth]

Hi,

I underdstand that when selling an IP, the cost base is reduced by the amount of the capital works deductions which I have claimed or were entitled to claim over the years.

However, what I am not sure about is do I actually have to write the value of the depreciating assests in my sales contract or is a depreciation schedule sufficient?

I'm under the impression that the sales contract is just an agreement between seller and buyer and my accountant will work out the rest. But I have been told by someone who said they read somewhere that you need to write down the value of the depreciation asset in the sales contract.

Thanks.

 

[WashingtonBrown]

Good point

Technically you were advised correctly...that there is an obligation for a vendor to pass the written down values of the capital works deductions on to an incoming purchaser - or even more technically you have to pass on enough information for the purchaser that will enable them to work out their capital works entitlements.

It very rarely happens in residential property - but does more often in larger commercial deals.

Regards

 

[Paul@PFI]

Contract

The best practice is to include a copy of the existing depreciation schedule within the contract. This can be appealing to investors and might indicate tax benefits and assist a sale. For owner occupiers its no issue and they would just ignore it.

The contract does not need to seperately list or sell specific assets. One price inclusive. A seperate list of depreciable assets can be dangerous. For example if depreciation schedule lists a Smeg oven and its been replaced and its now a Westinghouse you could end in dispute. Your lawyer will give that advice when drafting the contract prior to offering for sale.

 

[Paul@PFI]

Technically the ATO have an expectation that the buyer will have acquired same assets from the vendor and "if" the schedule is providesd the closing book value by one taxpayer will equate to opening values of the other. But I have never once had a client requiested to provide the property of another taxpayer. ATO cant ask that. Its like them asking me to provide your invoices for a new kitchen. The ATO accept it doesnt happen or the depreciation schedule industry would be unable to redo a schedule ! So the practical solution is the schedule is redone. There is no such legislative or common law requirement for any seller to give anything to a buyer unless they agree to do so in the contract.

The usual issue is the buyer contacts a new depreciation schedule provider and its redone at extra cost all over again. Sometimes this can be a benefit and some assets get refreshed or assets improved in the past "X" years get added etc. I use a provider who guarantees their fee exceeds the benefits for this reason. No point paying $800 after 16 years to find annual deduction is $100.

Technically you were advised correctly...that there is an obligation for a vendor to pass the written down values of the capital works deductions on to an incoming purchaser - or even more technically you have to pass on enough information for the purchaser that will enable them to work out their capital works entitlements.

It very rarely happens in residential property - but does more often in larger commercial deals.

Regards

 

[WashingtonBrown]

Took me awhile to find....but from TR 97 / 25

"Use of estimate when actual construction expenditure is not available

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."