MCG QUANTITY SURVEYORS BLOG

The pitfalls of specialisation; Depreciation deductions maximised with estimating department

Specialist Depreciation Advice

We live in a world of specialists, and for the most part, it’s a good thing. We use buyers’ agents to find us the best real estate, mortgage brokers to find us the best loan and comparison sites just to help us compare different companies. Why? Well the majority of the time it’s because we end up with a better service and a better outcome. I’m sure a veterinarian could do a fine job of mending your broken leg, but it’s assumed that a medical Doctor has more experience with human legs, and is therefore the far better choice as the up-to-date expert on all things Fibula related.

It’s often been said that a tax depreciation specialist is the only choice when it comes to selecting a depreciation firm. For the most part, I agree. There have been too many companies pop up at tax time, just to chase some work to complement their day to day construction estimating duties.
For what it’s worth, I am a depreciation specialist. I have personally completed thousands of schedules from residential to the most bizarre of commercial entities. I manage a depreciation team with similar expertise in depreciation. It’s all we do day in day out, and we love it.
Similarly, we also have a cost planning team. They are specialists in what they do and work on construction projects from feasibility through to construction completion. They’re involved in the property lifecycle far before our tax depreciation experts are ever involved. It’s actually this early involvement that so critical to our depreciation department, and is just one of the ways we’re able to maximise the deductions for our clients.
How does it work? Well a depreciation schedule requires that we estimate construction costs. The dwelling or shell itself, but also specifically the plant and equipment items (carpets, ovens, hot water systems etc.)

Construction costs are sourced from previously completed estimates, actual costs provided by the client (both for a whole property and individual components) and from construction cost databases that are amazingly exhaustive. This information is generally a few months old, and the major construction cost handbooks are published yearly. All depreciation firms have access to this kind of information, but this is precisely where not all information is equal.

The advantage of having a cost planning department is that we have access to construction costs that are current right now, today. We’re being provided costs from builders and developers such as concrete (both material and labour), P.C items such as vanities & toilets, floor coverings, appliances and everything in-between. Our job is to estimate from a set of plans, and we’ll track the project from start to finish based on our initial estimates.

The methodology used to calculate the structural component of a depreciation schedule consists of estimating the construction cost as at today, and it is indexed back to the time it was completed, such as if a house was built in July 1995. So the starting point is always todays construction cost. Without a cost planning department, our data would not be up to date, and we’d be working from a less accurate starting point. Generally, construction costs rise steadily, and being on top of the current rates enables us to maximise our client’s deductions.

In addition, let’s be honest here, not all properties are created equal. Variances range from level of finishes to inclusions. So a construction cost handbook will only get you so far. If construction cost handbooks were the bees knees, then why is it that when builders submit a tender, they all vary!
I would go so far as to say that these forms of reference literature, have a place, largely as a QA point or guide. If they are not the basis for builders to price their developments, then why would you want to depend on them for your depreciation calculation?

Builders, architects, financiers and developers use quantity surveyors to estimate building costs for tenders and bank finance. Why? We are the experts. If the building industry demands the need for an expert quantity surveyor to provide the true cost of the development (not a cost handbook), then surely the same has to be said for tax depreciation schedules.
So are we a depreciation specialist? Yes! Is it all we do? No. Do we believe that having an additional department makes us less of a specialist? Quite firmly the opposite, as I’ve explained above.

It’s certainly difficult to wade through the quagmire of depreciation firms spouting their respective points of difference. However, I wanted to make it clear that whilst specialisation is key, sometimes it pays to have a greater depth of experience and up to the minute data.

– Mike Mortlock, Managing Director, MCG Quantity Surveyors