How Depreciation Estimates Assist Developers and Investors 2

Monday, July 11th, 2016
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While quantity surveyors who specialise in property depreciation primarily spend their time producing tax depreciation schedules which outline the deductions an investor can claim, their skills can also be used to provide construction cost estimates to establish the depreciation potential of any property.

Subsection 262A (4JA) of the 1936 Income Tax Assessment Act requires the previous owner to provide the new owner with relevant construction cost information. This information will allow the new owner to determine any capital works deductions (claims for the wear and tear of the building structure) that may be available.

Unfortunately, this transfer of information between owners is not always possible for a number of reasons. Therefore, a provision has been included within the Act to allow construction cost estimates to be prepared by a qualified professional for submission.

Outlined within Tax Ruling (TR) 97/25, quantity surveyors are recognised within a list of professionals who are deemed qualified to provide construction cost estimates. This list also includes clerks of works such as project officers for major building projects, supervising architects who approve payments on major projects, and builders who are experienced in estimating construction costs for similar projects.

TR 97/25 also enables developers and investors to employ a suitably qualified professional with the most relevant experience to provide depreciation estimates and comprehensive depreciation schedules, even if that particular professional was not involved during the construction phase of the property.

This ruling is strengthened by an ATO Issues Log in October 2006 (A235 Building Cost Estimate Acceptance). The ATO Issues Log confirmed that construction cost estimates from an appropriately qualified professional such as a quantity surveyor would be accepted in the case where a property owner had not made a reasonable effort to obtain the actual cost details from the previous owner.

Construction cost information used to estimate potential depreciation deductions can provide significant benefits for investors who are considering purchasing an investment property.

These depreciation estimates can be provided by a quantity surveyor for any property available on the market, and investors can use this information when comparing their options to calculate how depreciation will impact their after tax scenario should they decide to go ahead and make a purchase.

It is important to note that a quantity surveyor will estimate and calculate depreciation for the plant and equipment assets within a property as well as the capital works deductions available. Often, it is the depreciation deductions for plant and equipment which will make the most significant difference to the actual deductions an investor can claim once they have purchased the property and it is income producing.

For developers of new projects, providing some information on the depreciation potential of a property can improve the affordability for prospective investors.

Once an investor makes their purchase decision, depreciation deductions help an investor to improve their available cash flow and reduce the costs involved in holding the property.

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  1. Charles Litho

    A very good reminder to make the system work for us.
    The true depreciation rate for most buildings is 4%, reduced by John Howard to 2% for taxation purposes.
    It might be affordable when times are good with high capital growth, but it will be a disaster to the economy when we get back to the norm. Rents may be need to be higher, to allow buildings to be maintained. Does anyone remember the times when the worst buildings in a street used to be rental properties? Does anyone remember the times when shops and factories were vacant for decades in inner Melbourne in the 20th Century.

  2. Barry B.

    Timely reminder – this issue remains widely overlooked by domestic property investors.