Incorrect Accounting Advice re CGT - Help please Depreciator!

[Pushka]

You know, last year I queried their high fees, because I had provided them with a very neat set of MYOB reconciled accounts etc. Their response was that while I supply the figures, they supply the 'professional expertise' to get the figures correct! That will come back to bite them on Wednesday when we meet.

So to summarise, the Capital Works deductions should be ignored and not used at all to increase our CGT because the property was purchased in 1996, and we have done no capital works expenditure because the appartment was new when we purchased it and it didnt need anything done.

However, because it contains depreciable items like bedding etc etc; the costs of these depreciable assets will reduce the purchase price, and on the other side, the balance of the depreciating assets decreases the sales price.

I have redone their calculations on the basis of the assumptions above, and this has reduced our overall tax bill by $8000! I am still way behind from where the Accountant said I would be, as referred to in my first post. I have found another email I sent just before settlement of our property, and gave him the exact figures, (which did not include any depreciation because i didnt even know about this), and he said my figures were correct. So I am considering professional negligence because I salary sacrificed into Super a huge amount, which I would have redirected into my tax bill if I had known his advice was wrong! So I have also suffered an actual loss as a result of poor advice.

Will be an interesting morning on Wednesday

 

[Les]

G'day Pushka,

Go get 'em !!

I have found another email I sent just before settlement of our property, and gave him the exact figures, (which did not include any depreciation because i didnt even know about this), and he said my figures were correct.

I wish you well for the meeting. Dale, Mry and CM have given you some significant backing for NOT accepting the current situation. And (from above quote) it seems even your Accountant has said "Yep, you're right the way you were!"

Are you selling tickets for the main event, Pushka? It sounds like it's going to be a sell-out !!!

Seriously though, it does sound like SOMEONE has been negligent. I wish you luck with it. And do let us all know of the successful outcome (or otherwise). Even if otherwise, it seems that there should be some recourse some way. Good luck,

Regards,

 

[Mry]

So to recap -

Capital Gains
Capital proceeds (ie sales) = Contract for sale - market value of depreciable items - market value of low value pool items.

Cost base = Purchase price - quantity surveyors value of depreciable items and low value pool on purchase - any special building writeoff if applicable.

Capital proceeds - cost base = capital gain (loss)

Depreciable items
Market value of depreciable items - closing written down value = taxable balancing adjustment. If positive, declare amount as taxable profit. If negative, claim loss.

Low Value Pool
Opening balance + pool additions for that year - market value of items in low value pool.
If positive, continue to write off in perpetuity.
If negative, declare amount as positive taxable income.

Did I miss anything?

Thanks for clearing that up Coasty. I was informed of the previous method by my previous boss, his partners and employee tax accountants, an ATO auditor, the ATO CGT specialist on their hotline and several nameless accounting associations. I shall take some time on Monday to vent.

 

[Pushka]

Lots of venting to be done today Mry....

You know, the calculation of CGT is such an important area of property investing, becaue no-one ever talks about it much before you go into an Investment Property. Yet it was almost a financial disaster for us if we needed to have $12,000 additional tax upfront come tax time! No-one, except for people on this forum, seems to know much about it!

Do you people have any idea how grateful I am to you?

 

[coastymike]

Pushka,

thanks for being grateful. the invoice for $15,000 (including GST) is in the mail. look forward to payment.

 

[sailor]

Pushka, thankyou for posting the original question, and thanks to all the accounting/depreciation experts who have given me such a wonderful education on this issue.

 

[Pushka]

Pushka, this is odd:

What sort of place was this? A $275K rental property with $45K worth of Assets? And why is their value being deducted from the cost base?

OK, time for an update. On Saturday I sent the Accountant an email outlining everything you people had said, along with an excellent little flyer I found on the ATO website, relating to the Pre 1997 issue. Didnt hear from them until the meeting Weds (CYA time methinks!) So the first thing they said was "oh yes, at exactly the same time as you found that information, so did we" Yeh right fellas, save that one for suckers!

So I scored on that one - just wish I had have waited to the meeting and totally caught them out!

They refuse to accept the accountability for incorrect advice.

Then I asked them to provide me with the depreciation schedule they were using (I had given it to them years ago and not seen it since!) Because like you Depreciator, I could not 'see' the $45,000 worth of assets!

Well, I got it today, and they have included things like tiling, built in cupboards, all of the pipes and plumbing, the bath, the behind the wall electrical wiring as depreciables and NOT as Capital expenses! But wait, they have, for the last 8 years depreciated these at rates varying from 5 to 15%!!!!! Instead of 2.5% Holy X%$t!

So, if we exclude these items (because of the date thing) our CGT has now dropped back to about where I thought it should be! Except we have now, because of the accountant, claimed way too much depreciation! Gawd! What do I do now?

Also depreciator, I just received a reply back from the Accountant and he is saying the depreciation rules re Capital costs was dated from the 1997 legislation, and as we bought in 1996 then these rules dont apply. But to me, a bath is a bath and I cant see that the Capital Costs definition has changed in 20 years! DO you know anything about that?

 

[WashingtonBrown]

Back in the "good old days" - when there wasnt much clarification on what constituted PLant & Equipment - most QS firms were claiming some of these items as Plant.

Regards

 

[Pushka]

Back in the "good old days" - when there wasnt much clarification on what constituted PLant & Equipment - most QS firms were claiming some of these items as Plant.

Regards

Is 1996 considered the good old days? And does the tax office recognise that? Its just that it makes a rather large difference to my tax position.

 

[Mry]

Is 1996 considered the good old days? And does the tax office recognise that? Its just that it makes a rather large difference to my tax position.

From a depreciation view, it was the good old days. I was just starting out in tax and reading what QS firms were claiming as depreciable was amazing. I do remember electrical wiring being one, as if it was a separable asset that you could easily remove from the house.

 

[Pushka]

So how does the Tax Office view QS doing this? It seems quite clear what is capital versus depreciable to me now, and has significant tax implications. They cant just make up their own definitions which are at odds with the Tax Office? Mry, as a Tax person, if you saw that items were incorrectly defined, what would you do about it? Would you change the items to what was correct according to the ATO, and would you do this if you had already lodged someone's tax return using the QS 'incorrect' definitions? And would you change it to the correct category to determine CG on sale? even if the depreciation had been incorrect in the past?

 

[WashingtonBrown]

You know, this is a very difficult question to answer for anyone.

When the ATO released the recent list, they indicated they wouldnt amend previous reports or seek to alter the previous claims - as this would be a technical nightmare.

That said - from memory, they has highlighted this would be case - provided the claims werent ridiculous.

Some of the items you have mentioned, unfortunately, may come under this category of silly.

Some items (bath tubs, electrical wiring) in my opinion were never "grey".

Grey areas may have been Ducting to A/C or fire sprinklers...but not bath tubs.

I have seen some reports where some QS's have claimed Painting as plant and equipment.

I guess this is more an accounting question on what to do now...just my two bobs worth.

Regards and hope it goes well.

 

[depreciator]

Depreciation is something that has evolved and will keep evolving. It was introduced here for residential property in 1985 - sort of compensation for the introduction of CGT.
Now back in 85, way before my time, I suspect the ATO didn't really explain it too well. Why would they when it was going to cost them money? And besides, hardly any residential investors would have heard of it.
Lots of accountants back then didn't pay much attention to it and lots of QSs didn't want to know about. Many still don't, until tax time rolls around and they start getting phone calls and they decide to take the money and churn out some dud Depreciation Schedules hoping their customers won't realise.... But I digress.
It wasn't until the last boom that mums and dads started hearing about depreciation. And because there was more talk about depreciation, the ATO slowly started to clear up some of the grey areas. Accountants paid more attention to it because their clients were asking about it. And some QSs started to specialise in it.
The definition of what constitutes 'plant' i.e. Asset/fixture and fitting vs building has never been great. I reckon you could argue just as strongly the case for a wall oven being 'plant' as you could for it being 'building'.
In 04, the ATO did their Effective Lives review. They put out a list of items and said: 'Here is what we think constitutes Plant or Assets (fixtures and fittings). It's a long list. (There is no list of what constitute 'building'.)
Back in the mid 90s, this Plant list didn't exist. And the definitions were pretty loose. That's why kitchen cupboards, vanities etc were often depreciated back then. (As for baths, though, never.)
Pushka, your accountant is grasping at straws (especially with the 1997 thing), but he's going to have to sort this out for you so you don't want to get him completely off side. He could argue (if asked) that he was operating within the prevailing understanding of that time. Back then, most accountants and QSs would have been using the rules that related to commercial property as a guide (in lieu of sufficient explantion re: residential). For example, 'Employee Amenities' i.e. some elements of the bathroom and kitchen fitouts, were Plant under the old commercial guidelines.
What is your accountant saying about the fact that you claimed too much depreciation previously? It would be complicated to sort out and it was some time ago.
Hope I haven't rambled too much.
Scott

 

[WashingtonBrown]

That said...this should give you some comfort...( I knew i had it somewhere!!)

http://www.washingtonbrown.com.au/news_story_property_tax.htm

If you had a third party prepare the report you would hardly fall into the category of blatantly claiming.

""We have always said we would only be adjusting blatant [false] claims,” ATO assistant deputy commissioner Elizabeth Goli said"

Hope this helps.

 

[Mry]

From what I remember QS people did operate under a lot of freedom in the last decade, either because the ATO didn't audit them or because the definitions of what was capital could be stretched or shrunk depending on who was defining it. After the ATO did some IP audits and disagreed with a majority of of QS reports (about 70% from memory of those they audited) they started being more specific on definitions and critical of what was going on, reminding taxpayers that depreciation claims were their responsibility.

If you had a QS report done in that period and used it, I would not bother revisiting it because you can't go back and amend over a 5 year period and the ATO accepted the report by not auditing you and letting the audit period lapse.

For more recent returns I do check the QS reports for accuracy. I have not had a problem with the big firms (Depreciator, Washington Brown, etc) but the small guys are really bad. When I get a bad report, I call up the QS and talk to them about their reports and request an amendment when they admit to mistakes. I remember looking at a report and thinking it looked like a report from the 90s and spoke to the QS who admitted to mistakes and sent a corrected one to my office. The last bad report I received used the wrong rates, underestimated the allocated amounts in my opinion and couldn't even calculate the days correctly. He admitted to the miscalculation but wouldn't change the rates, so I changed the rates myself to the ATO safe harbour rates.

The test I use to see if a QS is any good is if in their reports they tell you that you can put depreciable items under $1,000 into a Low Value Pool. I also keep in mind that 50/50 owned properties can put items under $2,000 in a Low Value Pool.

 

[depreciator]

I'd say what Tyron and I and MRY are sort of getting at is that you might be best leaving sleeping dogs lie. I'm sure your accountant would be happy to do that. His errors were due to ignorance more than anything and he wouldn't have been alone back then.

 

[WashingtonBrown]

I'd say what Tyron and I and MRY are sort of getting at is that you might be best leaving sleeping dogs lie. I'm sure your accountant would be happy to do that. His errors were due to ignorance more than anything and he wouldn't have been alone back then.

Good summary Scott!!

Regards

 

[Pushka]

What a minefield seems to have been uncovered! OK, so perhaps they need to revisit last years tax return only then! The thing is, if I am able to move some of the things from plant to building under the new definitions, because I purchased before 1997 yada, building is exempt from CG calculations, and this will save me around $6,000 CG tax. So, if I totally let sleeping dogs lie, I will have to pay this tax. But I will have to amend last years TAx return deductions, I still think I am ahead if I amend though! WDYT?

 

[depreciator]

So, if I totally let sleeping dogs lie, I will have to pay this tax. But I will have to amend last years TAx return deductions, I still think I am ahead if I amend though! WDYT?

A bit tough to answer, Pushka. It's hard to know what effect errors in the past have on your current situation and how best to minimise your CGT. It's one for your newly educated accountant to sort out.