n Claim more from older properties

n Don’t get into hot water with claims

n Technical Liftout Capital Gains Tax and building depreciation

n Technical Liftout BMT go CSV

n Expert advice increases returns

Inside this Issue

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I ssue 33 Winter 2013 Biannual Publ icat ion

Regional Variations

61% of depreciation schedules prepared by BMT Tax Depreciation are for pre-owned properties. Of these schedules, 33% are properties which were built prior to 1985 and see owners claim an average of $4,042 in annual depreciation deductions in the first five years.

Property depreciation is made up of two main elements: capital works deductions and depreciation of plant and equipment. Capital works deductions are deductions available on the structure, including items that cannot easily be removed. Depreciation of plant and equipment is available on mechanical and removable fixtures, including those deemed to have an effective life set by the Australian Taxation Office.

The capital works component of a property is strictly qualified by age. Legislation states that for any

residential property which commenced construction prior to the 18th of July 1985, the owner will not be able to claim capital works deductions. For commercial buildings this date is the 20th of July 1982. Depreciation of plant and equipment is not limited by age; it is the condition and quality of each item which contributes to the depreciable amount.

Specialist quantity surveyors identify a large proportion of available deductions on older properties through plant and equipment depreciation deductions. On average, 15% of the total construction cost of a residential property is made up of plant and equipment. This includes items such as carpet and hot water systems, as well as less obvious items such as garbage bins, mechanical exhaust and door closers. These plant and equipment items are rarely the same age as the building, usually

being replaced or updated over time. The greater amount of plant and equipment items identified, the higher the depreciation claim.

Another important part of maximising claims on older properties is identifying any additional works, extensions or internal refurbishments which have taken place over the life of the property. Even if the work were completed by a previous owner, any structural addition completed after the qualifying dates can be claimed as capital works, further increasing deductions. A specialist quantity surveyor will be able to identify and estimate costs of all additional works, extensions or internal refurbishments on older properties.

Substantial depreciation deductions may be claimed by engaging a BMT Tax Depreciation specialist to assess an investment property, no matter the age.

Claim more from older propertiesNo matter the age, no property is too old to claim depreciation

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Don’t get into hot water with claimsRepairs and maintenance or capital improvements?Concerns about the cost of repairs and ongoing maintenance for an owner’s investment property can be reduced by claiming back these costs when an investor is completing their tax return. Before an investor can start to tally deductions, it is necessary to understand the difference between claiming repairs, maintenance and capital improvements.

Repairs & maintenance

Work completed to fix damage or deterioration of a property is defined as repairs, e.g. fixing part of a damaged fence.

Work completed to prevent deterioration to a property is defined as maintenance, e.g. servicing an air conditioner.

A deduction for expenses incurred because of repairs or maintenance on an investment property can be

claimed completely within the current financial year.

Capital improvements

Improving the condition or value of an item beyond its original state at the time of purchase is defined as capital improvements. Capital improvements must be depreciated or claimed as capital works deductions over time. Capital improvements are classified as either capital works deductions or plant and equipment. Capital works deductions include structural additions and renovations such as adding and extending an internal wall and also includes items fixed to the

property which cannot easily be removed. Plant and equipment

items include removable or mechanical items such as carpet, hot water systems and stoves.

To determine how expenses on an investment property

should be claimed, an investor can consider the following questions:

Has the property or item been improved beyond its original condition at the time of purchase?

If an item provides something new or changes the character of the original item in any way, it will be considered a capital improvement.

Was the asset partially replaced, or replaced entirely?

Partially replacing an item due to damage or wear and tear is classified as repairs and maintenance. If an owner decides to replace the entire item to improve the property’s value, it will be considered a capital improvement.

A BMT Tax Depreciation Schedule will only include items classified as capital improvements. Repairs and maintenance can be separately claimed as a 100% deduction with an accountant when an investor is completing their tax return.

BMT can answer questions about alterations, additions, repairs or improvements and the implications they may have on depreciation.

Repairs, maintenance

or capital improvements,

do you know the difference?

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Technical Liftout

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I ssue 33 Winter 2013 Biannual Publ icat ion

Capital Gains Tax (CGT) can seem complicated for property investors, especially when considering the implications of property depreciation and when a CGT exemption is available. There are huge benefits available to investors who claim depreciation on plant & equipment and capital works deductions on a property which will be sold, especially when the 50% CGT exemption is activated.

A CGT event takes place when assets are sold. It applies to assets that have been acquired or have had capital improvements since CGT came into effect (20th of September 1985), unless otherwise exempt.

When a property is sold it will usually make a capital gain, therefore

triggering a CGT event. Once exemptions have been applied, the gain will be included in the taxpayer’s assessable income for that year. A capital loss does not reduce a taxpayer’s assessable income; instead, taxpayers are able to offset the loss against a capital gain in the current or future financial years. A company will pay the company tax rate (currently 30%) for capital gains.

Capital Gains Tax & building depreciation Simplifying a complicated tax issue for property investors

Plant & equipment (Division 40)

Depreciating plant & equipment (or Division 40) deductions are available on mechanical and easily removable assets within a property. When a property is sold a gain or loss is calculated separately for these items. Where applicable, capital proceeds can be distributed between the property and depreciating assets to determine a separate tax consequence.

Capital works deductions (Division 43)

Capital works (or Division 43) deductions are available on the structure of the building, including items that cannot easily be removed such as windows, tiles and electrical cabling. Capital works deductions will reduce the cost base, adding to the capital gain. This in turn will increase the amount of CGT applicable.

How to calculate CGT for a property:

Capital

Gain/ Loss

Cost Base = Purchase Price + Capital Costs*– Capital Works Deductions*Costs associated with acquiring, holding and disposing of a property including stamp duty, legal and agents fees.

Continued over page

= Selling Price - Cost Base

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Use your mobile device to scan this QR code for more on CGT exemptions.

Use your mobile device to scan this QR code for more on CSV reports.

CGT examples

Less than 12 months

12 months or more

50% CGT

Purchase price $400,000 $400,000

Capital costs (+) $20,000 $20,000

Capital works deductions (-)

$10,000 $10,000

Cost base value $410,000 $410,000

Selling price $500,000 $500,000

Capital gain $90,000 $90,000

CGT 50% exemption

$0 $45,000

Taxable capital gain $90,000 $45,000

Tax @ 37% $33,300 $16,650

After tax cash profit $56,700 $73,350

In the above example there is a capital gain of $90,000 (taking into consideration associated costs & capital works deductions). The CGT 50% exemption reduced the taxable capital gain to $45,000, saving the property investor $16,650 in CGT. The $10,000 capital works deductions are available to the owner in full (for this example the 37% tax rate is used), resulting in a $3,700 return during ownership. When the CGT event is triggered, the capital works deductions are subtracted from the cost base. Instead of $10,000 only $5,000 of capital works deductions were added to the taxable capital gain because of the CGT 50% exemption. This resulted in only $1,850 of CGT rather than $3,700. Claiming the capital works deductions resulted in an increased cash flow of $1,850.

Claiming these deductions ensures that a property investor takes advantage of the added cash flow throughout ownership, especially when the property is held for more than twelve months activating the

CGT 50% exemption. That aside, having access to the

extra cash flow during ownership makes financial sense due to the change in value of money over time. This also

provides an opportunity for the property owner to

invest the extra money or reduce loan liabilities.

During the full term of ownership, the capital works and plant and equipment depreciation available will be claimed as a deduction at the investor’s marginal tax rate. These deductions will reduce tax liabilities therefore generating additional cash savings each year.

If the property is sold and the owner has held the property in their name for more than twelve months, only 50% of the capital gain will be added to their assessable income. This means, only 50% of the capital works deductions claimed during ownership will carry through to the CGT event hence making it far better for a property investor to claim the capital works deductions.

f CGT example

The following example shows two scenarios and the different outcomes should there be a CGT event before or after twelve months of ownership.

For this example, an investment property is purchased for $400,000 and then sold for $500,000. We will assume the capital works deductions claimed are $10,000 while capital costs are $20,000 for both scenarios. The 37% tax rate has been applied.

BMT go CSV

CGT will vary based on each scenario. When considering the sale of an investment property, BMT Tax Depreciation strongly recommends talking to an accountant about the implications of CGT and the exemptions available. Other CGT exemptions may include the principal place of residence exemption, the six year exemption rule and the six month exemption rule. To view additional information on CGT exemptions please go to www.bmtqs.com.au/cgt-exemptions or scan this QR code.

For further information on how building depreciation affects CGT contact your local BMT office.

In response to feedback from accountants Australia-wide, BMT Tax Depreciation have developed a depreciation schedule in CSV format.

CSV, or Comma Separated Values, is a universal format widely supported by consumer, business and scientific applications. This allows for quick and easy importing into accounting software.

The new CSV format will save accountants time and improve accuracy. This option is available with every BMT Depreciation Schedule completed and can be emailed to accountants.

The CSV report is now available for Sage HandiSoft, with formats for other accounting software packages to be rolled out shortly.

Please scan this QR code or visit www.bmtqs.com.au for more information or to request a CSV version of a report.

Property investors benefit

by claiming depreciation on a property that is

to be sold

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Expert advice increases returnsBMT finds an extra $28,200 in depreciation deductionsWorking with accounting professionals, specialist quantity surveyors have the knowledge and construction costing expertise to accurately assess a property’s depreciation potential. This could result in a property investor claiming an extra $28,200 in depreciation deductions in the first five years.

A depreciation schedule prepared by a qualified quantity surveyor will ensure all depreciation claims are maximised within Australian Taxation Office legislation and that no depreciable asset is overlooked. It is not uncommon for a property investor to self-assess or estimate costs in their investment property based on their own judgement; potentially missing out on significant depreciation deductions.

The specialist difference

Following is a real example of a client’s self-assessed depreciation deductions compared to the depreciation deductions identified by a BMT Tax Depreciation specialist for an investment property.

f Depreciation example

The client purchased a three bedroom house in an outer Sydney suburb for $610,000. The property was constructed in 2004.

Self-assessed versus expert assessed deductions in the first full year

Self-assesed deductions

BMT’s deductions

Capital works deductions

$6,750 $6,200

Plant and equipment

$2,100 $9,700

First full year TOTAL

$8,850 $15,900

First five years TOTAL

$35,400 $63,600

In the first full year BMT were able to identify an extra $7,050 in depreciation deductions and an extra $28,200 in deductions in the first five years.

The deductions for the capital works (or the structural part of the property) were similar, however the deductions for plant and equipment items (or mechanical and removable assets) were grossly underestimated or

completely missed when the investor self-assessed. BMT were able to identify more plant and equipment items within the property which significantly increased and accelerated depreciation deductions.

A specialist quantity surveyor will identify plant and equipment items which may otherwise be considered capital works. This will increase the rate at which items within the property can be depreciated, making the most of available deductions.

There is no item too small to consider including in a depreciation schedule. Low-cost assets and low-value assets all add up to help maximise depreciation benefits. If an asset has sufficiently low-value, legislation allows it to be written off much faster; sometimes the complete value can be claimed immediately.

The one-off cost of engaging a specialist quantity surveyor has proven to be worthwhile; property investors can increase their cash return by potentially claiming significant depreciation deductions.

BMT are proud members of

PerthLevel 28, 140 St Georges Terrace Perth WA 6000Ph: 08 9485 2111 Cairns181 Mulgrave RoadCairns QLD 4870Ph: 07 4031 5699 CanberraLevel 6, 39 London CircuitCanberra ACT 2600Ph: 02 6257 4800

SydneyLevel 33, 264 George Street Sydney NSW 2000Ph: 02 9241 6477 BrisbaneLevel 7, 320 Adelaide Street Brisbane QLD 4000Ph: 07 3221 9922Gold CoastSuite 30610, Level 6 SouthportCentral 3, 9 Lawson StSouthport QLD 4215Ph: 07 5526 3520

AdelaideLevel 5, 121 King William StreetAdelaide SA 5000Ph: 08 8231 1133 HobartHobart Corporate CentreLevel 3, 85 Macquarie Street Hobart, TAS 7000 Ph: 03 6231 6966

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As per standard practice, to adjust costs for various regions simply multiply the construction cost by the regional variations opposite. This will give you an approximate cost for the construction type per square metre in your area.

The above rates are exclusive of GST. Please visit www.bmtqs.com.au for more information.Disclaimer

The information including the Construction Costs contained in Maverick is provided for general information only and on the understanding that neither BMT & ASSOC Pty Ltd, BMT Tax Depreciation Pty Ltd nor any of its officers or employees are providing professional advice on any particular matter or are liable for any error or omission in the information or any damage or loss suffered from any reliance on that information. Professional advice should be sought for your particular circumstances.

The Construction Costs are average prices in a Metropolitan Area and should be adjusted with reference to specific conditions. They are not intended to be relied upon or used for tendering or pricing variations. Construction Costs include costs of labour and materials, waste, hoisting, fixing in position and a profit allowance based on prevailing market conditions but exclude any GST, costs of land, demolition and any work outside the footprint of the building.

Construction CostsIncluding Regional Variations

Newcastle19 Brunker Road Broadmeadow 2292Ph: 02 4978 6477MelbourneLevel 50, 120 Collins Street Melbourne VIC 3000 Ph: 03 9654 2233DarwinLevel 1, Paspalis Centrepoint 48-50 Smith Street Darwin, NT 0800Ph: 08 8941 3115

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Construction Type Level of FinishHouse Low Medium High3br brick veneer project home, level block, single level, shelf design .................................................. $1,065 $1,270 $1,6303br full brick project home, level block, single level, shelf design ........................................................ $1,090 $1,305 $1,6704br brick veneer home, level block, single level, unique design ........................................................... $1,570 $1,750 $1,9504br full brick home, level block, single level, unique design ................................................................. $1,640 $1,810 $2,0103br brick veneer project home, level block, two level, shelf design ...................................................... $1,110 $1,310 $1,7103br full brick project home, level block, two level, shelf design ............................................................ $1,130 $1,400 $1,7904br brick veneer home, level block, two level, unique design ............................................................... $1,700 $1,900 $2,0504br full brick home, level block, two level, unique design .................................................................... $1,780 $1,970 $2,250Architecturally designed executive residence ...................................................................................... $2,160 $3,250 $5,050

Townhouse2br, single level brick veneer townhouse, including allowance for common property ........................... $1,250 $1,490 $1,7402br, 2 level brick veneer townhouse, including allowance for common property .................................. $1,350 $1,580 $1,9003br, single level brick veneer townhouse, including allowance for common property ........................... $1,235 $1,475 $1,7253br, 2 level brick veneer townhouse, including allowance for common property .................................. $1,340 $1,610 $2,270

Unit3 level walk-up unit complex, concrete structure, ground floor parking ............................................... $1,650 $1,820 $2,3203 level walk-up unit complex, concrete structure, basement parking ................................................... $1,615 $1,785 $2,2854-8 level walk-up unit complex, concrete structure, ground floor parking ............................................ $1,720 $1,950 $2,6504-8 level walk-up unit complex, concrete structure, basement parking................................................ $1,650 $1,920 $2,6158 or more level unit complex, including lift and basement car parking ................................................. $1,710 $2,280 $3,030

Commercial1-4 level open plan offices, including A/C & lifts, excluding fit out ....................................................... $1,480 $1,760 $2,2904-8 level open plan offices, including A/C & lifts, excluding fit out ....................................................... $1,620 $1,850 $2,4008 levels and over, including A/C & lifts, excluding fit out ...................................................................... $1,880 $2,064 $2,770

IndustrialHigh Bay Warehouse, standard config, concrete floor, metal clad ....................................................... $810 $885 $980High Bay Warehouse, standard config, concrete floor, pre-cast concrete wall clad ............................. $1,050 $1,110 $1,250

RetailSuburban shopping mall area including A/C ........................................................................................ $1,590 $1,810 $2,100Supermarket, including A/C, excluding fit out ...................................................................................... $1,380 $1,500 $1,670

Hotel/MotelSingle level boutique motel, including A/C, guest facilities .................................................................. $2,650 $3,200 $4,500Single level tavern/hotel, including A/C, excluding loose item fit out ................................................... $1,980 $2,350 $2,650

Regional VariationsHobart 87 - 97%Canberra 96 - 104%Melbourne 98 - 108%Adelaide 98 - 110% Sydney 100%Perth 100 - 120%Brisbane 105 - 115%Cairns 115 - 130%Darwin 110 - 120%