MCG QUANTITY SURVEYORS BLOG

Phase A Depreciation Estimates – For the savvy investor and shrewd agent

Proactive property developers and sales agents are using Phase A Depreciation Estimates, or ‘Phase A’s’, to help market developments to investors.

What is a Phase A?

A Phase A Depreciation Estimate is a report which shows the potential depreciation deductions available to a property investor, based on a specific property or development. Phase A’s are most commonly found when looking at a unit within a major development. The Phase A’s are generally prepared in line with the major unit variations. For example you’d have one report for the 1 bedroom units and another report for the 2 bedroom units.

The reports generally show a minimum and maximum range of deductions over the first few years of ownership. A good Phase A will show ten years worth of minimum and maximum deductions, and will also break up the Division 40 items (Plant & Equipment Assets), which are things like the blinds, stoves, carpets and the like, from the Division 43 component, which represents the building structure.

Property investors are becoming more aware of potential depreciation deductions. In fact we’re receiving daily calls from prospective purchasers asking what the deductions would be per year on specific properties. Investors are also turning to excel sheets and investment analysis templates to analyse their current and potential investment properties. These tools require the purchase price, rental income and interest rate in order to spit out some interesting figures and metrics such as rental yield, cost per week before tax and so on. Depreciation is a key component to many of these investment tools and this leads to investors asking sales agents what their likely deductions are if they purchase the listed property. A good sales agent will have a Phase A ready to hand to the investor.

Phase A’s provide developers and sales agents an easy way to show the depreciation allowance available based on the specific property and are almost exclusively prepared free of charge by Quantity Surveyors. Whilst depreciation is just one part of the investment decision, it can mean the difference between properties being unaffordable on a weekly basis to manageable or even cash flow positive.

Why do Quantity Surveyors prepare Phase A’s free of charge?

The Phase A’s are merely estimates, but they’re generally very accurate. However, a Phase A report cannot be used by a property investor to calculate their depreciation entitlements at tax time. The investor would need to engage the Quantity Surveyor to provide a full Capital Allowance & Tax Depreciation Schedule specific to the property purchased, in the purchasers name and based on their settlement date and purchase price. The good news is that you’ll often be able to have a full report prepared at a reduced fee due to the Quantity Surveyors familiarity with the development.

How is a Phase A prepared?

Most Phase A’s I’ve prepared personally have been for properties under construction. This means that I’ve needed to source the plans for the development and the schedule of inclusions. This is a very accurate way of providing an estimate as the exact floor area is known and there’s normally a great amount of detail about the types of kitchen appliances, floor coverings and the like. It’s also something that agents always seem to have ready at hand, as it often forms part of their advertising anyway.

Other Phase A’s can be prepared on established properties where there are no plans or inclusions lists available. These include commercial properties or individual established houses. The best way to prepare an estimate is based on the estate agents photos and notes. Simply looking up the property on their website can provide excellent photos of the plant and equipment items. The size of the property can be tricky to estimate. However, we can often find the size of the property through some of our search information providers. The age of the property is one of the most crucial considerations when preparing estimates on established properties, but the construction completion date is often on record at the local council. Wherever the level of detail is poor, the minimum and maximum depreciation ranges will tend to increase. These estimates still provide a good idea of the potential deductions, and the accuracy can be increased where more detail or information becomes available.

Phase A reports are generally 3-5 pages long with some information specific to the property, advice on having a full report prepared, but the most important part is the figures themselves. Below is an example of some estimates I’ve prepared on a new residential property for sale.

Phase A Example

Phase A Depreciation Estimate Example

You can see the box on the top left hand side shows the maximum range, with the Plant & Equipment Items and the Division 43 component adding to make the total depreciation. The property is likely to achieve between $8,112 and $9,554 worth of depreciation deductions within the first full year under the diminishing method. The graphical analysis simply follows the figures within the minimum and maximum ranges and charts them to show the decrease in deductions over each subsequent year, and the cumulative deductions over time. You can see that after ten years, the property is likely to achieve over $60,000 worth of depreciation deductions.

Phase A’s are a fantastic tool to market a property that is geared towards property investors. A unit development of 30-40 units is surely to end up with a number of investor purchasers. These estimates enable investors to analyse the potential cash flow of the property and make a more informed investment decision. For developers and real estate agents, the reports represent a free tool to assist the prospective purchasers with the information they need to progress towards the decision to purchase or keep looking. No major development should be without a Phase A.