QS Reports and Scrapping - Lesson

[Paul@PFI]

This is a real world example and demonstrates the benefits of a QS report and its use for scrapping.

Client didn't have a report and wasn't convinced of merits of parting with $700 for a report as intent was to rent for a year or so then demo and rebuild then rent those new IPs. Following discussions client agreed to obtain the schedule and claimed deductions for 2014 of $8K. That alone paid for the report...But here comes the cream......

19th July 2014 tenants moved out. Demo about to commence. Demolition so that rebuild of brand new IPs on site can proceed.

So what can be claimed ?
* $78,000 of remaining Div 40 (Depreciation) and Div 43 (Cap Allowances) can be claimed during the 2015 tax year.
* $Interest deductions under Steels case principles during the build
* Cap Allowances and Depn on the new build.
* Demo costs add to CGT cost base for the new IPs.

No better reason to do a PAYG Variation !! Likely to mean a withholding rate of zero.

Probably the best $700 the client ever spent.

 

[Terry_w]

Great example Paul!

 

[Jaggannath]

haha didn't want to pay $700 for one? Yeah, I hate money too!

Some of that stuff I hadn't considered could be included, so thanks for sharing.

 

[stumpie]

This is a real world example and demonstrates the benefits of a QS report and its use for scrapping.

Client didn't have a report and wasn't convinced of merits of parting with $700 for a report as intent was to rent for a year or so then demo and rebuild then rent those new IPs. Following discussions client agreed to obtain the schedule and claimed deductions for 2014 of $8K. That alone paid for the report...But here comes the cream......

19th July 2014 tenants moved out. Demo about to commence. Demolition so that rebuild of brand new IPs on site can proceed.

So what can be claimed ?
* $78,000 of remaining Div 40 (Depreciation) and Div 43 (Cap Allowances) can be claimed during the 2015 tax year.
* $Interest deductions under Steels case principles during the build
* Cap Allowances and Depn on the new build.
* Demo costs add to CGT cost base for the new IPs.

No better reason to do a PAYG Variation !! Likely to mean a withholding rate of zero.

Probably the best $700 the client ever spent.

Paul,

Under what conditions would you recommend not proceeding with a QS report?

I am in a similar position but the house was built approx 1940s or 50s it will be demolished in a few months and over the years I've had it not much was done to it.

any advice is much appreciated.

 

[Paul@PFI]

Not too many really. I like the QS firms that have a price guarantee. If they cant find deductions its free..The biggies all do it it. The scale the fee back and will even hand it over for free its the result is that small. How can you lose ??

 

[BMT Tax Depreciation]

Paul,

Under what conditions would you recommend not proceeding with a QS report?

I am in a similar position but the house was built approx 1940s or 50s it will be demolished in a few months and over the years I've had it not much was done to it.

any advice is much appreciated.

Hi Stumpie,

There are a couple of important prerequisites for scrapping. The first is that you have to have a depreciation schedule to scrap from in the first place (otherwise, what values will you claim?).

The second is that a property should be an IP on BOTH sides of the renovation/demolition. Otherwise you're claiming a write-off for assets you never intended to use as part of your investment and, well, the ATO doesn't like that.

However, you'll need to clarify your situation. Exactly how long have you owned the house? How long has it been a rental for? And do you have an existing depreciation schedule to scrap from? I could give you an idea of viability if you can fill me in on that.

Chris

 

[depreciator]

There might not be much there, Stumpie.
The building is old and there are no significant renos you are disposing of.
It will get down to what improvements you have made, assuming you have not claimed them along the way as repairs - you mention you have owned the place for some years.
The Assets are not likely to be worth anything either.
For anybody to be more specific, they would need to know how long you have owned the place, what has been done to it, what has already been claimed.
If it was a post 87 built property or an old one with renos, it would be a no brainer.

 

[Paul@PFI]

Paul,

Under what conditions would you recommend not proceeding with a QS report?

I am in a similar position but the house was built approx 1940s or 50s it will be demolished in a few months and over the years I've had it not much was done to it.

any advice is much appreciated.

Strategies can be VERY complex in the area of devs like this. Most people have no idea of what they may miss.
- Of course deductions depend on use of the IP prior to demo. Needs to have earned assessable income. I would generally say get a QS to advise is rule #1. If they say its not worth it then that's enough. If they say its worth it then do it.

Strategies to use market v's cost to trigger CGT in one year and a (lower) ordinary income profit in another. Problem with this method then is a timing issue. That's where the scrapping can be valuable. It may offset the CGT....Too often many investors, dev and even accountants overlook the obvious. Look for MORE income to offset the deduction. It may give a CGT discount and lessen overall tax and may mean lower cashflows when PAYG instalments etc are considered.
- GST strategies
- If you plan to keep and you build there is often a temptation to just use builder costs for depreciation. No QS fees. That is VERY foolish in my view. Massive benefits to a real QS report v's builder estimates etc.

 

[BMT Tax Depreciation]

Yes, as depreciator said, the two factors are improvements (you say you haven't done much) and time owned. Your words were "over the years I've had it". If that time is only a few years then it may well be worth investigating because you'll at least have some residual deductions on plant items like hot water systems, ovens, floor coverings, etc. Depending on what's there, we could still possibly find a scrap-able value of a couple of thousand dollars in deductions. So, the year of your purchase is now the most pertinent detail.

Chris

 

[Burramys]

The IP was bought vacant, and the kitchen was completely replaced. The kitchen was post-1985, but quite run down. After the reno a tenant moved in. It seems from the above that a tenant must be in place before and after the demolition before a QS report is allowed by the ATO. Is this so?

 

[scha9799]

WOW !!!

I really appreciated Paul, Chris, depreciator and everyone's comment here !

I didn't realised there are so many details about the depreciation schedule.

It makes me realised that I may be able to make more money on my renovation on my previous project..... I had a old unit, I didn't get the QS report, because I was renovating in a year's time..... I should have done a QS report to before I did my reno......

 

[depreciator]

I reckon it's a good idea to talk to an accountant (one with good knowledge of property investing) before you do anything to a property. Much of the benefits are in the timing of what you do.
Scott

 

[Paul@PFI]

The IP was bought vacant, and the kitchen was completely replaced. The kitchen was post-1985, but quite run down. After the reno a tenant moved in. It seems from the above that a tenant must be in place before and after the demolition before a QS report is allowed by the ATO. Is this so?

Yes, normally. A tenancy of convenience wouldn't work....ie rented to a relative for a month before the demo when its an uninhabitable structure.

 

[Jatabeau]

I bought two neighbouring properties in June this year. I have them both rented out whilst we get the DA to build 30 apartments on the site. I want to use a demolition schedule for both properties, which we intend to demolish in mid January (DA expected November). My new accountant says it will reduce our cost base and so no good. My old accountant says it does not reduce cost base and should be done. I spoke to the ATO who seem to agree that a Demolition Schedule would be beneficial in our circumstances. My QS has no previous experience with them...may need a new QS. I would be moving ahead with the Schedule if my current accountant was not so adamant (and sounded so convincing) that it is not a legitimate strategy. Please advise anyone????

 

[BMT Tax Depreciation]

Happy Monday, Jatabeau!

We recommend getting the depreciation schedule so you can scrap it. Yes, if there are capital works deductions available on those properties then they will reduce your cost base and thus there may be CGT implications if/when you sell but usually the benefits of the depreciation and scrapping far outweigh these concerns. May I ask how old they are? If they're pre-1987 with minimal renovations then there won't be many (or possibly any) capital works depreciation deductions available anyway.

And, of course, once you demolish then everything on the schedule is an instant write-off.

I hope that helps!

Chris

 

[Paul@PFI]

I bought two neighbouring properties in June this year. I have them both rented out whilst we get the DA to build 30 apartments on the site. I want to use a demolition schedule for both properties, which we intend to demolish in mid January (DA expected November). My new accountant says it will reduce our cost base and so no good. My old accountant says it does not reduce cost base and should be done. I spoke to the ATO who seem to agree that a Demolition Schedule would be beneficial in our circumstances. My QS has no previous experience with them...may need a new QS. I would be moving ahead with the Schedule if my current accountant was not so adamant (and sounded so convincing) that it is not a legitimate strategy. Please advise anyone????

Get a new accountant. One who knows property taxes. I just advised a client on this precise issue and he claimed $80K...And a 0% PAYG Variation.

You scrap on the last day of tenancy!!. It IS a write off BEFORE the land adds to trading stock - The cost base of P&E and Building CANNOT form part of trading stock in any case - Only the land. Basic issue is you would lose a deduction if you listened to the accountant.

Cost base ?? Its not like there is a CGT issue. Building 30 aprts the profit issues prevail over the land value issues.

What does the numpty accountant say about the margin scheme which would also save $$ ??