Visual Evidence of Depreciation Benefits

There could potentially be a much nastier surprise than that. There is a view that:-

The law is clear – if you were entitled to claim a tax deduction, you must reduce your cost base, whether you claimed it or not​

How adding back building depreciation works - Australian Property Investor magazine

If you did not claim depreciation but you were eligible to claim the depreciation you may still need to reduce the cost base by that amount.

I don't know if this is still the case but I agree with conclusion:-

It isn’t a case of whether you’ve had the benefit of claiming the tax deduction for the depreciation. The law is clear – if you were entitled to claim a tax deduction then you must reduce your cost base, whether you claimed it or not. The Australian Taxation Office (ATO) has made some concessions to a strict interpretation of the law but of course it could change its mind at any stage, so you may as well take the tax deduction while you can.​

How adding back building depreciation works | Solid Investment Property

It looks like there are some exceptions but I think it is a smarter move to claim the depreciation you are entitled to and be certain of the outcome.

 

Agree with Perthguy. However that position is more in the case of someone who has a schedule who chooses not to use it than someone who chooses not to obtain a schedule. If you dont obtain a schedule then the costbase adjustment amount cannot be determined. I have always found that position a bit absurd....Isnt the case one of "I dont have a schedule". Even if you did perhaps the dog ate it ?

Just completed 2 year amendment for a client to add in the QS report deduction. $6420 new refund.

I have a well recognised QS available to do UK property schedules if any investors have UK rental property. The deduction doesnt impact UK tax but can assist AU tax. Contact me if required.

 

Depreciator has been doing depreciation schedules for some of our clients with UK properties. Well they at least organised it for them anyway.

 

We know a QS over there. Very senior. Worked in Sydney for some years and then went back home. Even he is not sure why. He works on major projects and I think he likes doing our stuff for the change of pace more than anything.

 

I will leave that "nasty surprise" for my grandkids when my trusts expire in 80 years .

I would rather get a dollar back today as a tax refund and pay an extra 50 cents in CGT down the track.

The dollar is worth more today, I have had use of the funds for all that time, I only have to hand half of it back and that half is then worth less than what it is worth today.

That's my thinking. Happy to be corrected.

 

Had a report finished by Depreciator last week. I enquired about it in like April or May and after 6 months of not getting the info to them my wife got the ***** and did it for me. 34 year old unit, recently renovated, 5.5k deductions in the first year for a few hundred spent on a report. 20k over the next 10 years. This happy camper is finally lodging his tax returns.

 

Vixs - Great news. (Not the wife cracking the sh^&%s, the report outcome)

 

Not quite ...depreciation is a expense that is funded in cash ...it is just an expense that is spread over many years.
That expense of course mostly gains income/rental
This purchase of the depreciable asset may be a great investment (continues to be in demand ) a bad investment (becomes obsolete in the practical sense )

 

OK. Would it have read better if I originally wrote "depreciation is an expense that is not funded by cashflow"?

 

Depreciation is really the spreading of the initial "investment/temporary asset/expense " over it's expected life.
We should not confuse depreciation with tax deductions
For the tax deduction
We can't claim the tax deduction on the initial purchase . We can only claim the deductions based on the ATO rules.
The jest of what i am saying is that the tax depreciation is not a cashflow benefit as it is not matched to the cash outlay (period wise that is)
It is better to have a expense that is fully deductible matched to the cashflow
I am not saying it is bad buying an asset ...that answer is really does the net income from the asset exceed the cost (DCF...adjusted discounted cash flow)
I have done my number crunching and feel (my opinion only) it is better to flag the depreciation tax deductibility ie not buy the building at all ..forgoing the rental for the structure Just buy the land and renting just the land.
Ps I personally think there should not be any ATO depreciation at all
We should be able to claim the whole lot matched to the purchase date
If at a later date the item is sold more than cost then the deduction is reversed ...that of course is unlikely to happen in our lifetime!

 

Disagree 100% Beano.

Depreciation IS a cashflow benefit and is a deduction whether you like it or not. Ignore the initial outlay for the building etc - Thats often funded by finance but its still an outlay. The walls, floors, and roof all potentially depreciable (over a LONG...time).

The true cashflow associated with a QS report property v's one without are these:

- OUTFLOW Cost of report. A initial fixed fee often $550-$900
- INFLOW Enhanced annual tax deduction s of around 30-45% of the enhanced deductions claimed.
In a perfect world thats it. No extra profit or loss on sale as the deduction "should" match. However when we consider appreciating assets like property this si somewhat different and a final cashflow effect is :
- OUTFLOW Higher CGT profit occurs and is taxed accordingly. However this is often concessionally taxed at half the marginal tax rate v's a property without the same QS report. This cushions the effect by as much as approx 25% of that cashflow out.

Depreciation is a well recognised concept used globally by business, individuals and governments globally in developed and undeveloped countries that reflects the gradual erosion of a productive asset whether its shelving and checkouts in a supermarket, a vehicle (truck or car) or even plant and equipment. This aligns with the concept of profit making so that in theory a income producing asset will erode in value progressively so that if the depreciation is not too excessive the item would produce no profit if it is sold at any future time. Thats the concept. Depreciation normally reflects the expected life of the asset to avoid a one-off deduction or inefficient asset utilisation.

If depreciation was to end business investment would almost cease. Superfunds would not buy office towers and lease them to Govt and Govt would not not furnish them. The workers would have no workplace and so on. The roads the workers drive on (tollways etc) would never be built and replaced. The lifecycle of infrastructure would cease like a third world economy.

Depreciation is like fresh vegetables. You pay a high price for fresh and the squsihy sluggish tomato's are used for juice / canned spaghetti and cost very little.

In property the old dump on land is valued at $0 for a reason. It has no value. Its a knockdown. Probably worth less than the land only as it costs $ to demo.

 

I am totally going to use this in every conversation with a prospective client from now on.

 

I wasn't going to argue with @Beano (too much on my plate at the moment) but I am glad someone did. We claim depreciation on every IP we own. I advise our kids to do the same thing.

@Paul@PFI, thank-you for exposing it so eloquently.

 

You can't have 100pc disagreed with me as most of what i read is similar to my views

To keep short the point i am making is

Depreciation is the spreading of the cost of asset over its estimated economic life
For ATO tax purposes the tax deductibility is also spread over the economic life rather than on purchase
The benefit to the purchaser does not occur on purchase but in later years (assuming there is assesable income)

My opinion and my point is ...i would rather not buy a asset that i can claim depreciation for (as it loses value and the tax deductability only partly covers the initial outlay)
I prefer to buy items that are 100pc deductible at time of purchase AND assets that don't depreciation ie land

 

What sort of asset can you claim 100% at the time of purchase? You cannot claim the cost of land as it is a capital expense.

 

No need to argue with me I also claim depreciation on items that i capitalise
BUT in my opinion I prefer NOT to buy assets that depreciation (and claim ATO depreciation ) I prefer buying assets that appreciate with no ATO depreciation claim

 

Assets that are below the threshold , education in staff, marketing ,prepaid expenses ...i consider anything that improves income in future years a asset. Anything that is consumed within the year an expense. So prepaid expenses i consider a asset.
That is correct land is a capital item that appreciates and can't be claimed tax wise ...thats why i enjoy buying it
I don't think i am the only person on PC that prefers to buy appreciating assets with no depreciation over depreciating assets with depreciation claims?

 

I think your definition of 'asset' differs to most people's definition!

 

I think i differ from many persons on PC

 

This is it in a nutshell. You're doing next level stuff that the rest of us "garden variety" can't. Yet.

So to us having the Depreciation "benefit" on the building helps to hold the appreciating land.