MCG QUANTITY SURVEYORS BLOG

My favourite QS BS – The top three furphies spouted by the depreciation industry

As a Quantity Surveyor or QS if you will, I have the pleasure of a little inside information when it comes to reading some of the articles or catch phrases written by other quantity surveyors. No sour grapes here, for the most part we all get along. I have some great relationships with a number of owners of QS firms, some I consider genuine friends. However, it’s probably about time I call out some of the BS (I’ll let you figure that acronym for yourself) that has been spouted for years by depreciation companies. I think as an industry we can do better, and I just can’t stomach BS statistics and people being misled. So, here’s my top 3;

  1. 80% of property investors are not maximising their depreciation deductions

What a great statistic, it’s a shame it’s not based on any research or indeed, true.

I’m not quite sure exactly where this line came from but if you google it as a phrase, you’ll see it quoted by major media outlets and property businesses. I’m talking the big names.

Why am I calling BS? A number of reasons namely;

  • This research cannot be found. It’s often prefaced by “research suggests” but see if you can find it yourself. I’ve spent many an evening trying (tip: decline an invite to a dinner party at my house if the situation ever arises).
  • This number has never changed, yet this has been flying around the internet for at least a decade.
  • Given all the attention given to this statistic, shouldn’t that number be dropping? Have the people that started saying this failed in their mission?
  • I’ve spent over a decade educating people on depreciation entitlements. It hasn’t just been me either. Far more important people and businesses have been doing the same, like accountants for example. I can tell you anecdotally that investors are so much more educated about depreciation than ten years ago, and that knowledge is increasing.

It would be great if we could just agree that this line has had its decade in the sun and maybe come up with some new material.

  1. The average deductions investors can claim in the first full financial year is around $5,000 to $10,000.

Firstly, look at the language of this one. Anyone else have an issue with the word ‘around?’
This one actually led me to set the record straight. If you can excuse a little trumpet blowing, I embarked on a mission to find the exact figure a few years ago. We analysed our latest 1,000 residential depreciation schedules and found that figure to be $9,183. We were the first quantity surveyors to ever publish actual average deductions, along with a number of other statistics. Ok so that figure fell within the range, but it depends on the time period. We ran a similar test of reports completed after the budget changes to depreciation and came up with a different number, one of which was above $10,000.

The problem is the lack of actual information. Whilst I’ve not yet had the time to publish a whitepaper on our research, at a moments notice I can have it independently confirmed. Additionally, when you conduct this research you also encounter the problems with it. For example, we’ve had clients only want division 43 or building only schedules done, when they were actually also entitled to plant deductions. We excluded this from our research because it was out of line, or to put it another way, not a true representation of what that investor was actually entitled to. There are a number of other examples I won’t bore you with, but as we share this data, we’ll note some of the criteria applied to it in the small print.

  1. You can claim up to 60 percent of your investment property purchase price as depreciation

This is one of the worst ones, and you’ll see that number change. The Australian Institute of Quantity Surveyors (AIQS) has warned us that factoring the purchase price into an estimate of the depreciation is not the correct methodology or starting point. So, this percentage is fairly meaningless. Take for example a house built in the 1960s in Sydney with no renovations and a view of the harbour. In fact, we did a report on a seven million dollar house in a similar condition and the deductions we’re just getting us across the line. In percentage terms we’re talking 0.02% of the purchase price.
Now consider two units within the same block. One has a view of the water, the other a carpark. The depreciation should be the same if all other things are equal, but as a percentage of the purchase price they’re worlds apart. That’s why I tell people that this percentage of the purchase price is not a metric that should be relied upon at all.

Now, why is it garbage? What they’re saying is that up to 60% of your sale price is likely to be building and plant and equipment items. What I don’t understand is the cap. There’s no legislation to say there’s a maximum percentage of the purchase price.

Consider an out of line or distressed sale, and these are fairly common with commercial properties. Or even a house sold to a family member cheaply. Some accountants have argued with me on this, but I’ve prepared schedules where the deductions were higher than the purchase price? Why? We estimated the construction value of the property, and we didn’t care what someone paid for it. If you bought a brand new shopping centre for ten million but it cost eleven million to build then good for you, but your purchase price didn’t change the construction cost. I’m no accountant and maybe they weren’t comfortable using our estimate, but we stand by it and are called upon as expert witnesses in court due to our expertise in this field. You can see the results of those cases as public record.

Maybe, and this is a real stretch, but maybe research could show that 60% is a reasonable average, but I’m not about to conduct that as I see it as a huge waste of time as it cannot be used by investors as a guide on a case by case basis.

 

I’m going to cap it at three BS numbers, lest this become mad tirade but do me a favour and call out this stuff when you see it. It’s lazy, tired, misleading and about time we started questioning some of the things we read.