Mike needs advice.

From: Mike .


Hi All,

I don't often ask advice so I'm hoping you'll put your collective genius towards my cause.

Since I'm relocating to London shortly for higher wages and renting my home till I get back (6-10y), I had a discussion with a Quantity Surveyor today with a view to getting a depreciation schedule. But the cost is going to be prohibitive, in the order of $1500 to $2000. To determine whether this is reasonable let me give some background:

I don't qualify for capital allowance on the building (complex of strata units and townhouses) since it was built before 1985. However, since I bought the unit in Aug '97 I have spent about $30,000 in capital improvements and fixtures. Therein lies the problem of the depreciation schedule or rather schedules. I'm talking MULTIPLE schedules. Since the improvements were staggered over 4 years, the surveyor has advised me that the ATO would require separate dep. schedules since each item starts its dep. life when it is installed. At over $1000 for the building report (strata has 31 units and townhouses) and $150 per item, eg kitchen, bathroom, vinyl flooring, tiled laundry, built-in robes, doubleglaze windows, skylights, insulation, plus fixtures such as blinds and ceiling fans, possibly some furniture... need I go on?

Questions:

1. Is this too much to pay?
2. Can an accountant provide me with a cheaper solution?
3. Should I forget about the whole thing and add everything to the cost base? Definitely not, since I don't pay CGT on my residence anyway. Since I'll be paying taxes on the rental income I'd like to clawback some through property related tax deductions.

Any advice welcome.

Regards, Mike
 
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Reply: 1
From: Michael G


Mike,

I would think more than $500 is too much. Unless of course they are going to count every nail and drop of paint?

Ask them to justify the cost, why is it more than normal?

Also note - a cost to a business is the location. A shop in the city must make more to cover the higher cost of leases.

Shop around!

Michael
 
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Reply: 1.1
From: G Chaggar


Hi Mike,
Try Harmon and assoc. their no. is 97542333
i used them for my property and was very happy with their service.

cheers

Gurbinder
 
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Reply: 1.1.1
From: Ten of Diamonds


I'm not sure how their price compares, but I used Baranyay Quantity Surveyors and Cost Planning in Melb (ph 8800 3058). It cost $495 and was for a standard newish apartment (not tricky like yours). But the results were good, much higher than the indicative depreciation schedule I got from the builders.

ToD
 
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Reply: 1.1.1.1
From: Mike .


Thanks Michael, Gurbinder, & ToD for your replies.

I spoke with the ATO today and explained why I felt I couldn't justify the cost of a professional Quantity Survey report.

They said that there is provision in the Depreciation rules to have a Depreciation Schedule done by other suitably qualified persons such as Architects, Clerk of Works, Accountants etc, although some of these professionals might be more expensive than a Quantity Surveyor.

I asked the ATO would it be alright if I did the Depreciation Schedule on the improvements myself and have it validated for accuracy by an accountant if I produce receipts? They said yes.

I also stated that I didn't wish to do a schedule on the building itself since it doesn't qualify for a Capital Allowance, anyway. There may be items that could be depreciated but I feel that it wouldn't compensate for a $1100 report. The ATO agreed to this also.

Regards, Mike
 
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Reply: 1.1.1.1.1
From: Paul Zagoridis


Hi Mike.

Did the ATO agree in writing? ;-)

If you have receipts, I thought it was possible to prepare your own depreciation schedule.

Quantity Surveyors are necessary where you need an expert's appraisal of value and useful life of an item you didn't purchase.

Paul Zagoridis
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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Reply: 1.1.1.1.1.1
From: Mike .


Hi Paul,

Do you think I should get a private ruling on this matter? The adviser on the phone didn't mention it and I didn't think to ask.

Also, you said: "If you have receipts, I thought it was possible to prepare your own depreciation schedule."

I think the ATO are primarily concerned with the accuracy of the depreciation schedule. Of course, the receipts show the cost of the improvements but that doesn't necessarily mean I have accurately translated that to a depreciation schedule. I think the ATO would rather trust the competency of a suitably qualified professional in making those calculations. Should I be insulted?

Regards, Mike
 
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ATO 'advice'?

Reply: 1.1.1.1.1.1.1
From: Paul Zagoridis


Sorry Mike but I don't trust the ATO. They are bureaucrats first and foremost.

No I don't think a private ruling is necessary, but telephone advice from them is worth the paper it is printed on. It is not binding nor reliable. However, it is useful to check your logic with them. I use and pay qualified professionals for my tax advice, never the ATO.

The adviser on the phone should have told you about obtaining a private ruling. If they neglected that, what else did they neglect?

A depreciation schedule is just like an amortization schedule for a loan. There is a mathematical formula for working it out based on the inputs. There is no magic in the schedule.

All businesses depreciate assets. They start with a cost base. Then determine it's useful life and depreciation method. Presto X% or Y$ per year depreciation. Nothing complicated to it. Accountants do it every day. The schedule saves you having to recalculate each piece of plant and equipment in a property every year.

If your plant and equipment wears out faster, there is a system in place to claim the extra deduction. If it lasts longer there is another system, just don't get caught fiddling this system constantly in your favour.

The use of a suitably qualified professional gives you additional strength if it ends up in dispute. Some areas the law allows you to rely on a QS. It doesn't mean they are the only source.

And it isn't the calculation the ATO is concerned about. It's the estimates of value and usefule life that they want accurate. They want to know the basis on which you came up with the numbers.

One way QS pay for themselves, they look at a Strata Scheme's common property and identify depreciable items you can claim when you don't have receipts. If you have just bought a house there are similar deductions a QS can identify. Again it isn't the schedule that takes expertise.

Paul Zag
Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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ATO 'advice'?

Reply: 1.1.1.1.1.1.1.1
From: Waverly Bay


Mike - that is a hell high quote you got there.

Don't bother your accountant with things like tax dep schedules - their expertise is in preparing the books, doing audits and filing tax returns.

And definitely don't bother with getting a tax ruling for a depreciation claim.

From my experience, getting a dep schedule is more than just collecting a few receipts and plugging them into a spreadsheet to work out the depreciation. The depreciation claim in your case is not confined to the new improvements that you can support via the receipts: you can also claim on stuff like the common areas in your strata block.. and on existing nitty gritties like light switches, blinds, curtains, floor coverings and taps. Even if your block is pre 1985... there will be a hell of a lot of stuff that is claimable. In the past, I have managed to squeeze 35K of depreciation out of an unrenovated 1970 2 bedder that cost $350K. Most of that was immediately deductible when the renovation was done.

That is why it is critical to get a QS to do the report for you. The QS will do more than look at your receipts: he/she will need to work out the unimproved value of your prop and calculate how much of your purchase price for the property is attributable to depreciable fixtures and fittings. Also, remember: this is their expertise... and their expert opinion will come in very handy if the ATO ever decides to question your depreciation claims.

If you like surmising over whether to use the "prime cost method" vs "diminishing value method", or don't mind trying to put a value to an existing blind or working out its effective life (not to mention repeating the process for the carpet, the blinds, the curtains, etc..) - then, by all means- work it out yourself !

BTW, I spoke to my QS today ..and on the side mentioned your situation. If you have invoices for your renos.... my QS said he will do a depreciation schedule for you for a grand total of $385 (GST inclusive). If your property is in Sydney, drop me an email and I will give you his details.

One more thing: GGT on your residence. You said 6-10 years in London. Beyond 6 years of renting, you may end up with a pro-rata CGT liability. Now that one you should check with your accountant.

Cheers

Waverly
 
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Reply: 2
From: Dale Gatherum-Goss


Hi

Mike, shop around for another QS. I am a CPA and my experience in tax audits suggest that the ATO will crucify you if you attempt to claim depreciation and special building allowances without such a report. Your accountant is not qualified to prepare one and you leave yourself without a defence.

I know of a couple of QS in Melbourne who are much cheaper and do a good job. If you want a recommendation, just ask.

As for CGT. If you move back into the property before the end of 6 years you can claim an exemption from CGT. This may make it something to consider getting further and more detailed advice on depending upon your own plans.

I hope that this helps.

Dale
 
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Reply: 2.1
From: Mike .


Thanks Paul, Waverly, & Dale,

My original intention was to use a QS for all the reasons you put forward. If I can find someone to do it for under $500 then I will get it done. I'm crossing my fingers.

Regards, Mike
 
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