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Tax Depreciation Schedule Inspections - When is an inspection required?

Mar 08, 2013

 

In most instances a Quantity Surveyor will conduct a property inspection when preparing a tax depreciation schedule. Sometimes this is not required, for example - if a property has been built by the owner or the Quantity Surveyor has previously inspected a unit within the same complex. A good Quantity Surveyor knows when an inspection is not needed, and this generally results in a saving to the owner/investor. But if certain information is overlooked you will miss out on significant tax deductions.

Below are the two main reasons why an inspection may not be required:

1. The Quantity Surveyor has inspected a unit within the complex before

This is one of the more common reasons that a Quantity Surveyor will not need to inspect the property. As they've been to the property before, the inspection on the common areas would have been completed, and they will apply their same information over the new unit, allowing for the new unit entitlement. For example, if the unit is larger, the unit entitlement might be 110/10,000 instead of the unit entitlement of 100/10,000 which applied to the previously inspected property.

The inspection would have also revealed the standard appliances through the property, the floor coverings, window furnishings light shades etc. Many property investors take advantage of this situation to save around a third of the cost of a depreciation schedule. However, the saving must be accompanied by a firm understanding of whether preparing the report without an inspection is appropriate.

Your Quantity Surveyor should explain their rationale after asking a few questions about the property. For example;

  • Has the property had any additions or renovations? - Two units side by side in a development may have been built identically, but have the owners differed in their property improvements? This is especially important in older developments, where the property may have had a new kitchen and bathroom installed by the previous owner. In this instance, the cost information is not available to the new owner. If improvements or renovations of this nature have been completed, the property should be individually inspected as the unit differs from the standard.
  • Are all units completed to the same standard? - A one or two bedroom unit on the second floor may have a vastly different standard of finish to the penthouse or units on the upper floors. In this instance, a previous inspection on a lesser standard of unit cannot be used as the basis for a report on the units with premium fixtures and fittings.
  • Is the property furnished? - If the property is furnished, the previous inspection needs to have been completed on a unit that was also furnished. Again, it's important that the furniture package is identical and that the furniture does not vary from unit to unit.

2. The property is brand new and the report is prepared based on the plans and inclusions/specifications list.

This is another of the more common reasons for a report to be prepared without an inspection. In this instance, the report is only as good as the level of detail contained within the plans. I've seen plans where the floor coverings are not completely specified and it's impossible to tell whether the living areas are carpet or tile. This may not sound important, but with tiles depreciating at 2.5% of their opening value each year compared to carpet at 20%, getting the measurements right equate to a major difference in deductions. You'd also need to ensure that the specifications list contains enough detail to determine the type of appliances, rather than just the brand, most of the time this information is available.

There are a number of companies that provide for a 'self-assessment' schedule where you're undertaking the  inspection yourself, and sometimes even providing cost information. The ATO allows for this under the self-assessment rule, however these reports tend to attract greater scrutiny (for good reason) and both the Tax Practitioners Board and Australian Institute of Quantity Surveyors have acknowledge that they are not in favour of this type of report.

Property investors can certainly save on costs where their property does not require an inspection undertaken. However, ensure that your Quantity Surveyor explains the reasons in simple terms, lest you miss out on additional tax deductions.

The information presented above is based on legislation prescribed by the Australian Taxation Office and the interpretation of the individual author as at the time of writing. This article should not be considered as tax advice.

Mike Mortlock is a Director of MCG Quantity Surveyors, providing residential and commercial tax depreciation schedules to property investors. He can be followed on twitter @mike_mortlock

Mention MR TAXMAN and you're entitled to a reduced fee depreciation report! Request a quote now by clicking HERE!

 

Tags: DeductionsPersonal taxProperty

Author: Mike Mortlock

Comments

"My husband and I are going to demolish our old rental property and build two new one. The builder is going to give us the depreciation schedule for both of new properties once they've been completed. Will the report be valid to ATO? Can we use it to do our tax return? Another thing. we've got the depreciation schedule for the old property and we have claimed it for the first year. Since we're going to demolish the old property in this financial year, can we claim the rest of the amount in that depreciation schedule this year (i.e. the amount claimed for this year is for the 2nd year - 19th year)? I would think that we can claim the rest of them as we are writing off/ scrapping the whole assets (both P&E and building). Thanks."

By: Carol on May 02, 2013 3:28AM

"The report should be valid if it reconciles to the actual costs that the biulder incurred. Yes you should be able to write off the remainder of the depreciation for the old property but be prepared to get a phone call from the ATO as they investigate a large claim made by you."

By: Mr Taxman on May 03, 2013 2:39PM

"Thanks, Mr Taxman. Just wondering, is there any tax ruling number? I can't find any reference in ATO website and I want to be prepared when they call. Thanks."

By: Carol on May 06, 2013 3:05AM

"Taxation Ruling 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9725/NAT/ATO/00001"

By: Mr Taxman on May 10, 2013 12:00AM

"And, another thing I just remember, since the depreciation schedule has 3 elements, which are P&E, low value pool items and capital work deductions, can we write off the low value pool amount as well? Thanks. This area is very confusing as some accountants says I can't write off, but it might trigger the CGT and I can carry the loss. "

By: Carol on May 06, 2013 4:25AM

"If you have a rental property then by all means claim the low value pool. CGT will be triggered anyway for investment properties."

By: Mr Taxman on May 09, 2013 11:56PM

"Thanks, Mr Taxman. You really are Mr Taxman :)"

By: Carol on May 10, 2013 4:07AM

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