Management rights & depreciation

Discussion in 'Accounting & Tax' started by cberg86, 2nd Jul, 2019.

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  1. cberg86

    cberg86 Active Member

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    Hi, hoping some of the more knowledge-able folks on here might know the answer to this.

    I bought a management rights business in sunny North Queensland, the contract was purchased in a Pty Ltd with a bank loan.
    I've read the ATO website that says you can't claim depreciation on intangible assets which I understand but from my point of view the contract has a fixed life(forgetting the fact it could be extended with body corporate approval) and would definitely not fetch as high a price in the future.

    To me that's the very definition of a depreciating asset, am I just way off base here?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Its value would decline over time I guess, because the lease gets shorter.
    In return you would be getting income to compensate this - it would all be factored in.

    if you disposed of it you might have a capital loss if the cost base is lower than the purchase price.
     
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  3. cberg86

    cberg86 Active Member

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    Thanks Terry! Always appreciate reading one of your replies.

    It's just fantasy thinking, it would help to be able to do it for the first year or two to lighten the tax load initially.
     
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  4. Beano

    Beano Well-Known Member

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    What sort of cost were the management rights, the lease period and what sort of income ?
     
  5. cberg86

    cberg86 Active Member

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    It's a small side business for me, I already run my own IT business & am partly involved in a family business.

    Bought it for $130k with 12 years left, 32 units in the complex with 3 owner occupiers(me included).
    Roughly $50k gross income from body corporate for minimal care-takers role.
    There's no letting pool which I want to restart, it's a perfect location for rentals.
     
  6. Beano

    Beano Well-Known Member

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    Seems like a good little side business
     
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  7. Michael Mitchell

    Michael Mitchell Well-Known Member

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    12 years, so Accommodation Module?...you should work on getting "Top Up's" to increase it to the maximum allowable term under the BCCM Act which is 25 years for Accommodation Module, and keep it there - you can do 1 x 5 year top up every financial year, so get on good terms with the Owners so they vote in favour of the motion. If you don't own a lot it's unlikely you have any voting rights at a general meeting level, eg. to submit a top up motion, so in this regard, you would need a 'friendly owner' who supports you to put forward your top up motion at the general meetings, or buy a lot in there to achieve your agenda (or perhaps if you have an office or storage area on title explore to see if that grants you voting rights). This will significantly increase the value of your business ("the 'rights"). You need to consult a specialist management rights lawyer to prepare, guide and handle this for you. Also while you're there, get "Gallery Vie" provisions taken care of too, this will assist with financing and selling one day (probably not so much for you but future buyers - opens your potential buyers pool right up). If it becomes clear the Owners have no interest in topping up your management agreement then sorry to say you've got a dead duck and you should just milk it for every penny until it runs to zero. Nb. if there is a letting agreement in place too, apply all the above to that agreement too. You could potentially turn this into a near $1m asset if you do it right and put some time and money into it.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The cost is not different to a franchise fee or goodwill when acquiring a business. It doesnt depreciate for tax purposes but may for accounting purposes. It may impact the values used to determine a CGT amount or loss later. It may be a active small business asset if you dispose of it ;)
     
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