Depreciation

[skater]

Can the depreciation experts help me with a query please.

So....I know someone who has just purchased a property that is a few years old. They told me how great it was, because they didn't have to waste money on paying for a depreciation schedule, as the previous owner had given them theirs.

Now, that does sound good in theory. I mean, the depreciation schedule is about depreciating the cost-base of an asset, and that should not change........BUT I also know that I've heard it said that you should always get a new one.

So, can someone clarify WHY a new one should be used, as I have absolutely no idea, and then I can pass on what I learn.

Oh, and while you are at it, why does the purchase price of an asset matter when doing a report. I've never questioned this before, but, hey, since I'm asking questions, I might as well ask this one too. Surely, unless the property is new, it is irrelevant how much you paid for it.

 

[depreciator]

With the existing Schedule, all Assets under $300 will have gone. And the Low Value Pool will have taken some big bites out of most of the others.
The new owners can have the Assets revalued to reflect their worth when they bought the property. For example, the rangehood in the Schedule may now be worth $0. But for the new owners it has a value.
The existing Schedule, if recent and done by a reputable provider, may have enough information in it to do a new Schedule at a reduced cost i.e. the build cost may not need to be recalculated.
Scott

 

[BMT Tax Depreciation]

Can the depreciation experts help me with a query please.

Now, that does sound good in theory. I mean, the depreciation schedule is about depreciating the cost-base of an asset, and that should not change........BUT I also know that I've heard it said that you should always get a new one.

So, can someone clarify WHY a new one should be used, as I have absolutely no idea, and then I can pass on what I learn.

When a property changes hands we are able to revalue the fixtures and fittings because they restart their lifespans starting from the new settlement date. There's nothing to stop your friend using the old one but they are shooting themselves in the foot and potentially missing out on thousands of dollars in deductions (due to them depreciating items from their written-down values, not their re-appraised starting values).

There's also the chance that another provider will probably give various assets (or even all of them) higher values to depreciate from.

Oh, and while you are at it, why does the purchase price of an asset matter when doing a report. I've never questioned this before, but, hey, since I'm asking questions, I might as well ask this one too. Surely, unless the property is new, it is irrelevant how much you paid for it.

In essence, a higher purchase price means that we can assign higher values to fixtures and fittings, irrespective of the property's age. This is under the rationale that part of the purchase price goes towards the quality of the fixtures, higher labour costs to install them, etc.

 

[skater]

Thankyou for your quick responses.

This is what I love about this forum.....Ask a question & it gets answered quickly.

In essence, a higher purchase price means that we can assign higher values to fixtures and fittings, irrespective of the property's age. This is under the rationale that part of the purchase price goes towards the quality of the fixtures, higher labour costs to install them, etc.

OK, with this, though, you could have negotiated a real bargain, because the vendor needed it gone ASAP. Or you could have paid ask price (or more). So I don't understand how this can have any bearing on the schedule. PLUS......not trying to tell you to suck eggs or anything.....shouldn't you be able to recognise whether the fittings are quality, or cheap & nasty.

 

[BMT Tax Depreciation]

OK, with this, though, you could have negotiated a real bargain, because the vendor needed it gone ASAP. Or you could have paid ask price (or more). So I don't understand how this can have any bearing on the schedule. PLUS......not trying to tell you to suck eggs or anything.....shouldn't you be able to recognise whether the fittings are quality, or cheap & nasty.

Yes, we would realise the quality of an item and would value it as such. A twenty-year-old oven would get a lower value than a two-year-old oven (though possibly still a surprisingly high value).

However, a lower purchase price would not lead us to reduce the value of an item. That's the opposite of what people pay us to do. It's just that if the purchase price warrants it, we can put more value in.

 

[Paul@PFI]

Thankyou for your quick responses.

This is what I love about this forum.....Ask a question & it gets answered quickly.



OK, with this, though, you could have negotiated a real bargain, because the vendor needed it gone ASAP. Or you could have paid ask price (or more). So I don't understand how this can have any bearing on the schedule. PLUS......not trying to tell you to suck eggs or anything.....shouldn't you be able to recognise whether the fittings are quality, or cheap & nasty.

Prior to a renovation I would encourage a revision to the existing schedule to identify all the items which will be lost or replaced. A before and after review will identify assets that are being scrapped and then identify all the new replacement items too. While this may sound expensive it can add literally thousands of extra dollars of deductions. For a cost of a few hundred. Sadly I see many people every year who tell me AFTER they do reno's and by then its too late.

Mt tip : Use a good QS and retain contact and seek their advice before doing anything new and exciting.

 

[BMT Tax Depreciation]

Prior to a renovation I would encourage a revision to the existing schedule to identify all the items which will be lost or replaced. A before and after review will identify assets that are being scrapped and then identify all the new replacement items too. While this may sound expensive it can add literally thousands of extra dollars of deductions. For a cost of a few hundred. Sadly I see many people every year who tell me AFTER they do reno's and by then its too late.

Mt tip : Use a good QS and retain contact and seek their advice before doing anything new and exciting.

Good advice, Paul. Yesterday I quoted for a scrapping job where, even at a glance, we saw that there would be at least another $5000-$6000 in deductions there. It definitely makes life easier if we look at the place prior to renovations taking place. Scrapping is still possible if we don't but the level of documentation we require on the property's pre-renovation contents is more than most people can provide.