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Claiming depreciation without falling foul of the ATO

Discussion in 'Accounting & Tax' started by Whiz, 8th Jul, 2016.

  1. Whiz

    Whiz Member

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    Over a 4.5 year period my partner has almost completely rebuilt an old home purchased for investment and now has it rented. Despite best efforts, only some 60 - 65% of receipts were recorded in a random list, and the total expense of the renovation would only be an estimate. There is still a pile of receipts that haven't been recorded, and many receipts can't be found.

    How does one approach getting correct depreciation on this property without falling foul of the ATO's expectation of keeping detailed records of renovations?

    I have been told that a depreciation schedule can be done but wonder how that accounts for the owner's labour and actual costs? (understanding that personal labour is not able to be included as a cost)

    If the owner opts to get the DS done, is it still necessary to itemise the remaining receipts?

    Most importantly, if an audit were asked for at a later date, where does the owner stand with regard to verifying costs? Can the depreciation schedule stand on its own?

    The objective is only to claim whatever is legally allowable without being shortchanged by the absence of good record keeping.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Since you know the value of some items you should probably give a list to a quantity surveyor and get them estimate the items you dont know.
     
  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Generally, if you can't justify the expense (with a receipt), you can't claim it eg. Paid cash for a discounted price, don't have a record of payment (receipt/cheque stub/credit card statement/bank transfer etc).
     
  4. Joynz

    Joynz Well-Known Member

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    Was you partner living in it for those 4.5 years?
     
  5. Whiz

    Whiz Member

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    No.
     
  6. Whiz

    Whiz Member

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    Many major items were paid by credit card or bank transfer, so there is a record, but not the actual invoice or receipt.

    If all the receipted costs are listed, but you can't claim on anything that doesn't have a receipt, is there still a benefit in getting a Depreciation report done?
     
  7. Scott No Mates

    Scott No Mates Well-Known Member

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    Have a chat with a QS like @Depreciator - he'll confirm which way you can go.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You can still claim depreciation on items without receipts
     
  9. Depreciator

    Depreciator Moderator Staff Member

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    Whiz, was this property one that you lived in while the four year reno happened and then made into a rental?
    If that is the case, there may be less expectation that all receipts were kept.
    This would not be an uncommon problem. Receipts are lost all the time in fires and floods and people moving house. Sometimes the dog might have eaten them.
    A QS can only go off the information provided. If all receipts are present, they can use them (so can your accountant).
    If no receipts are present, a QS can estimate costs from a description of the work done.
    So the QS acts under instruction and produces a document that the tax payer then uses to complete their tax return. That puts the onus on the tax payer.

    In response to this question:
    "Most importantly, if an audit were asked for at a later date, where does the owner stand with regard to verifying costs? Can the depreciation schedule stand on its own?"

    The accountants are best placed to answer this, but I imagine in the event of an audit if this issue came up, the ATO may say something along the lines of, 'I see you are claiming depreciation on that property. How did you arrive at those figures?'
    The best response would be, 'I engaged a quantity surveyor to produce a Depreciation Schedule.'
    That might be the end of it. If they roll up their sleeves and go much further, you have probably really upset them.

    This of course is not advice, just my opinion.

    Scott
     
    BMT Tax Depreciation and Terry_w like this.
  10. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Get a depreciation schedule. What Terry has said above is on the money.

    A QS is obligated to ask you for your costs but at the end of the day we can only use what we're given. We can't account for your labour if you worked for free. Most of the time people don't provide us with their actual invoices and receipts; a spreadsheet is sufficient and we'll use those figures as long as they are reasonable. If costs are unavailable then we can make an estimate.

    Any QS worth their salt will be happy to back up their document if called upon by the ATO to do so. If the provider is ATO compliant then the schedule should "stand on its own" but I can't speak too much about the audit process. Yours is a common situation so perhaps a tax agent here can lend their thoughts on the ramifications of a lack of record keeping.
     
  11. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Seems @Depreciator and I were writing pretty much the same response at the same time! So, there you have it.
     
  12. Scott No Mates

    Scott No Mates Well-Known Member

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    At least if you ask 2 QS's the same question you get the same response. Try that with 2 lawyers, accountants or engineers.
     
  13. Whiz

    Whiz Member

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    Thanks all for your opinions and advice on this matter.
    I have taken from this that getting the DS done will help to justify the legitimate expenses incurred throughout the renovation, (and will additionally keep the accountant happier I assume. :) )
    Good to know that this situation is not too far out of the norm.
     
  14. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Accountants usually agree. Its often the client that doesnt like the answer.