Do I need a quantity surveyor?

[Dos]

Benefits of Quantity Surveyor

Hi all,

Didn't really want to create a new thread but might need to with my questions.

Just purchased IP #2 on Saturday, good yield and very excited about taking the next step!! I have a couple of questions that I think Brenda, you may be able answer or anyone else for that matter.

Wife and I purchased a PPOR 2.5 years ago and purchased new PPOR 3 months ago. Have since had people renting the first place. I am keen to know when I should get Quantity Surveyors in and what the benefits of doing so are. I did a few searches but didin't really get the answer of "They will depreciate ??? (items), of which you will be able to claim $X at tax time"?? Also, does it matter that we lived there for a while and should I get them into the new IP straight away???

Any suggestions would be great!!!!

Dos

edit- dos, following yout thought, I did think it worth while to create a new thread, so I've pulled your post from its original thread. But details of the IP would help- sort of IP, age etc

 

[Dos]

Cheers for that Geoff.

The IP is 12 years old, lowset brick, 3 bed, 1 bath. Has A/C in main bedroom and the ususal kitchen appliances.

New IP is in a "rural" area, set on stilts, 4 bed, 2 bathroom and still waiting to find out "exact" age.

I basically was keen to know what the QS does, what the end benefit is and when to get them in.

Dos

 

[RPI]

My quantity surveyor has told me if he can't save me more money then he'll cost me he'll give me a refund. He's never given me a cent yet, even when the house has been 80 years old. You can lodge adjustments to tax returns to make up for years you haven't claimed depreciation.

darryl

 

[Peter_Tersteeg]

Dos do a search on quantity surveyor in this forum and you'll get plenty of stories about how much getting a report can save you in tax dollars, even on old houses.

I always obtain a QS report when I buy a house. It pays for itself many times over.

 

[Jacque]

Dos,
In the end, having a QS come in and do a detailed depreciation report for you will allow you to claim more on your tax return.
The ATO allows you to deduct all of the costs associated with owning an IP, providing they are related to the earning of income. So this includes the losses incurred on the differences between your interest repayments and the rent received. It also includes the PM fees, rates etc.
You can also deduct depreciation costs on both the building and the fittings etc. The benefit of being able to do this, however, is that these deductions are "on paper" and so you are not forking out cash in the first place (apart from the QS fee of course).
Great, isn't it?
The only drawback that I can see is that these deductions are added onto the capital gain of your property when you sell, hence increasing the cg payable. But, remember that $1 spent today is not worth the same amount in 5,10,15 yrs time.
In my experience, and in your shoes, I would order a QS report, particularly as it's less than 18 yrs old and qualifies for that extra building depreciation rate of 2.5%.

 

[Dos]

Jacque,

Thanks VERY much for that explanation. I have been scouring some websites for the last couple of hours and starting to get my head around it. As you say, I am looking to hold for a long time so if they add the dep later, I am sure CG will cover it.

Can you also tell me, when is the best time to get them in? Should I do it now as I have just purchased the place or does it have to be done just before tax time?? I suppose in escence, I am asking whether or not the Dep Sched will be "valid" or "accurate" come June next year if it is done now or will I need another one then?

Thanks again for your very easy to understand explanation, very appreciated!

Dos

 

[bundy1964]

Hi Dos

You only need to get 1 report done per property as it carries over for future tax years.

bundy

 

[Jacque]

No worries Dos! That's what we're here for- to help one another

 

[geoffw]

Originally posted by Jacque
The only drawback that I can see is that these deductions are added onto the capital gain of your property when you sell, hence increasing the cg payable.

Two things on this point.

1. If you've held the property for more than 12 months, the CGT is calculated on 50% of the CG- so it's much better to claim the depreciation

2. This quite surprised me when it came up on the forum recently- but it's only the building depreciation which gets added back into the cost base. If, for instance, you were depreciating curtains and carpet, the depreciation you claimed would not be added back in.

 

[Jacque]

Geoff,

I didn't know that it was only the building writeoff that was included. Perhaps I have been misled?
Can anyone from the ATO or familiar with cg issues clarify this?
I was sure that there was an article in API recently that discussed depreciation etc, but I've lost the mags in my study somewhere......
*Feel sympathy for Jacque as she wades through Christmas wrapping, paperwork and kids artwork to locate missing API's....*

 

[Les]

Dale, what is a "Balancing Charge?"

G'day Geoffw,

Watch out for this one, mate. S McK actually touched on this during the recent seminar. And I think I'm hearing that "technically", it is correct to say that only Building Allowance is applied against the cost base of the IP.........

But, Steve also mentioned a "Balancing Charge" (which effectively - from what I understood) has all other Depreciations still coming into the equation somewhere !!!!!!!!

As far as I could remember it, the Building Allowance DIRECTLY affects the Capital Gain (i.e. INCREASES it) - while the Balancing Charge sits in the background, and DOESN'T form part of the Capital Gain (thus, in my reckoning, would allow us to make more of a Capital Gain) - but needs to be "paid back" after Capital Gains have been assessed. Paid back on what terms, I don't know !!! But, it sounds to me like this might end up being WORSE than having it applied to the Cost Base, (depending on just HOW this Balancing Charge thing is applied) .........

As you know, this is NOT my area of expertise - time to "holler for a Dale!!" I think.

Regards,

 

[geoffw]

From a quick search, I did find a post of mine http://www.somersoft.com/forums/showthread.php?postid=79881#post79881 , pointing to the ATO site

I found the ATO "Rental Properties 2003" guide- http://www.ato.gov.au/individuals/content.asp?doc=/content/31610.htm&page=7#P689_60350


You must exclude from the cost base the amount of capital works deductions you claimed or were entitled to claim for a building, other structure or improvement

Also a post from Brenda- http://www.somersoft.com/forums/showthread.php?postid=78518#post78518

 

[Les]

G'day Geoffw,

From the "Brenda" link you provided, go back a few posts, and you see her saying this:-

Both the 2.5% special building writeoffs claimed and the fixtures and fitting claimed must be added back upon sale.

Now, THAT is what I had always thought - then later on Brenda said it was ONLY the Building Allowance that was subtracted from the Cost Base (when calculating the Capital Gain).

Others (in another thread??), including myself, were surprised to hear that (perhaps???) only Building Allowance was "clawed back" by the ATO when you sold a property......


THEN, I heard S McK (only 3 weeks ago) - where he mentioned Balancing Charge !!! Worth checking further, my man, as Steve is (was?) an Accountant - so maybe we are dealing in semantics here. If ONLY Building Allowance affects the Cost Base to calculate CGT, fair enough !!!

But, since it was mentioned by Steve McK, I would certainly like to know MORE about this "Balancing Charge" thing - which might reach out and bite us in the way we all thought it would anyway......

I'm sure I'd read many times that any Depreciations claimed would be "clawed back" if we ever sold an IP. MAYBE they are clawed back in different ways, under different names !!!! We need a knowledgeable person to shine the light on this whole question IMHO.

"Holler for a Dale!!!"

Regards,

 

[geoffw]

I'm not quite sure what this "balancing charge" is all about.

A search in this forum only shows one other thread, which does not relate to the question.

With all respect to Steve McKnight, I did feel that he rather glossed over depreciation in his book- something I thought was perhaps its biggest shortfall. I felt he was a little too dismissive of something which can be a worthwhile thing.

 

[yadreamin]

Hi all
if one buys a ip that needs a bit of a reno do you get the QS report done before or after the reno ?
and if you cannot get a QS report done because your ip is in a remote area what happens then?
cheers yadreamin

 

[DaleGG]

HI Les

In that same thread I answered that it is only the Special Building Write Off that is added back and not the depreciation. The law is very clear on this so I am surprised that there is this confusion.

Dale

Originally posted by Les
G'day Geoffw,

From the "Brenda" link you provided, go back a few posts, and you see her saying this:-


Now, THAT is what I had always thought - then later on Brenda said it was ONLY the Building Allowance that was subtracted from the Cost Base (when calculating the Capital Gain).

Others (in another thread??), including myself, were surprised to hear that (perhaps???) only Building Allowance was "clawed back" by the ATO when you sold a property......


THEN, I heard S McK (only 3 weeks ago) - where he mentioned Balancing Charge !!! Worth checking further, my man, as Steve is (was?) an Accountant - so maybe we are dealing in semantics here. If ONLY Building Allowance affects the Cost Base to calculate CGT, fair enough !!!

But, since it was mentioned by Steve McK, I would certainly like to know MORE about this "Balancing Charge" thing - which might reach out and bite us in the way we all thought it would anyway......

I'm sure I'd read many times that any Depreciations claimed would be "clawed back" if we ever sold an IP. MAYBE they are clawed back in different ways, under different names !!!! We need a knowledgeable person to shine the light on this whole question IMHO.

"Holler for a Dale!!!"

Regards,

 

[Apocalypse]

In regards to the "balancing charge", in the Rental Properties 2003 under depreciation it speaks of a balancing adjustment if the asset is no longer held/used. If you sell an asset you've been depreciating for more than its depreciated value, that's income, if you sell it for less, or it is destroyed, etc, the difference is a loss.

I think when such assets are sold as part of a property, they are effectively considered sold for their depreciated value, so no adjustment is necessary.

That's the way I read it anyway.

 

[Les]

G'day Dale,

The law is very clear on this so I am surprised that there is this confusion

Mate, it must be ME !!! I thought I recalled you saying something like that, but, tonight, for the life of me, I can't find it in ANY of the links....

Still, my thought was "OK, I accept that ONLY Building Allowance is applied to the Cost Base when calculating CGT".

But, then, what is this "balancing charge"? Is it ANYTHING that I would need to be concerned with if I were to sell an IP? Is it something that is a "charge" quite apart from CGT calcs? (you know, like "tacked on afterward", or something)

Or is this whole thing simply an aberration (in which case, I apologise for having brought it up in the first place).

Regards,

 

[DaleGG]

Hiya Les

A balancing charge is the difference between the sale price of an asset and the written down value of that asset. The written down value = the cost price less all of the depreciation claimed.

This applies to larger businesses, but not those businesses operating under the STS (Simplified Tax System) and again not those people who have IP's.

Wen you sell an IP there is no amount on the contract allocated to the sale of the air conditioner or carpet. Is there?

Therefore, the balance of the depreciation not yet claied would be written off as an imediate tax deduction and the investor will pay CGT on the full sale price. Remember though, this gives two distinct tax advantages:

Only 1/2 of the CG is taxed because we'll assume that the IP was held for more than 1 year; and
There is an immediate tax deduction for the remainder of the depreiation not yet claimed which will reduce the taxable income and provide for a bigger tax refund before the CG is calculated.

Even better though, is that because the taxable income will have fallen, the amount of CG will be lower again.

Another win for the good guys!!

Dale

Originally posted by Les
G'day Dale,

Mate, it must be ME !!! I thought I recalled you saying something like that, but, tonight, for the life of me, I can't find it in ANY of the links....

Still, my thought was "OK, I accept that ONLY Building Allowance is applied to the Cost Base when calculating CGT".

But, then, what is this "balancing charge"? Is it ANYTHING that I would need to be concerned with if I were to sell an IP? Is it something that is a "charge" quite apart from CGT calcs? (you know, like "tacked on afterward", or something)

Or is this whole thing simply an aberration (in which case, I apologise for having brought it up in the first place).

Regards,

 

[Apocalypse]

Originally posted by DaleGG
Hiya Les

A balancing charge is the difference between the sale price of an asset and the written down value of that asset. The written down value = the cost price less all of the depreciation claimed.

This applies to larger businesses, but not those businesses operating under the STS (Simplified Tax System) and again not those people who have IP's.

Wen you sell an IP there is no amount on the contract allocated to the sale of the air conditioner or carpet. Is there?

Therefore, the balance of the depreciation not yet claied would be written off as an imediate tax deduction and the investor will pay CGT on the full sale price. Remember though, this gives two distinct tax advantages:

Only 1/2 of the CG is taxed because we'll assume that the IP was held for more than 1 year; and
There is an immediate tax deduction for the remainder of the depreiation not yet claimed which will reduce the taxable income and provide for a bigger tax refund before the CG is calculated.

Even better though, is that because the taxable income will have fallen, the amount of CG will be lower again.

Another win for the good guys!!

Dale

So if you sell an IP, the "carpet and airconditioner" are considered sold for 0 dollars effectively, unless otherwise stated in the contract?

So the IP can be sold to another investor, who subsequently gets a QS in to determine the "carpet and airconditioner" have a sizeable depreciable value yet, which the investor then starts legitimately claiming...

Extending this, why not, when buying an investment property from a vendor for whom it is a PPOR, add to the contract some "values" for the carpets and airconditoner? The vendor should not care as it wont make any difference to them, but the investor can demonstrate a value which can thus be depreciated. As long as the "values" weren't too outlandish, this appears quite valid...