MCG QUANTITY SURVEYORS BLOG
Tax Depreciation Schedule Inspections – When is an inspection required?
In most instances a Quantity Surveyor will conduct a property inspection when preparing a tax depreciation schedule. Sometimes this is not required, for example – if a property has been built by the owner or the Quantity Surveyor has previously inspected a unit within the same complex. A good Quantity Surveyor knows when an inspection is not needed, and this generally results in a saving to the owner/investor. But if certain information is overlooked you will miss out on significant tax deductions. Below are the two main reasons why an inspection may not be required:
1. The Quantity Surveyor has inspected a unit within the complex before
This is one of the more common reasons that a Quantity Surveyor will not need to inspect the property. As they’ve been to the property before, the inspection on the common areas would have been completed, and they will apply their same information over the new unit, allowing for the new unit entitlement. For example, if the unit is larger, the unit entitlement might be 110/10,000 instead of the unit entitlement of 100/10,000 which applied to the previously inspected property. The inspection would have also revealed the standard appliances through the property, the floor coverings, window furnishings light shades etc. Many property investors take advantage of this situation to save around a third of the cost of a depreciation schedule. However, the saving must be accompanied by a firm understanding of whether preparing the report without an inspection is appropriate. Your Quantity Surveyor should explain their rationale after asking a few questions about the property. For example;
- Has the property had any additions or renovations? – Two units side by side in a development may have been built identically, but have the owners differed in their property improvements? This is especially important in older developments, where the property may have had a new kitchen and bathroom installed by the previous owner. In this instance, the cost information is not available to the new owner. If improvements or renovations of this nature have been completed, the property should be individually inspected as the unit differs from the standard.
- Are all units completed to the same standard? – A one or two bedroom unit on the second floor may have a vastly different standard of finish to the penthouse or units on the upper floors. In this instance, a previous inspection on a lesser standard of unit cannot be used as the basis for a report on the units with premium fixtures and fittings.
- Is the property furnished? – If the property is furnished, the previous inspection needs to have been completed on a unit that was also furnished. Again, it’s important that the furniture package is identical and that the furniture does not vary from unit to unit.
2. The property is brand new and the report is prepared based on the plans and inclusions/specifications list.
This is another of the more common reasons for a report to be prepared without an inspection. In this instance, the report is only as good as the level of detail contained within the plans. I’ve seen plans where the floor coverings are not completely specified and it’s impossible to tell whether the living areas are carpet or tile. This may not sound important, but with tiles depreciating at 2.5% of their opening value each year compared to carpet at 20%, getting the measurements right equate to a major difference in deductions. You’d also need to ensure that the specifications list contains enough detail to determine the type of appliances, rather than just the brand, most of the time this information is available.
There are a number of companies that provide for a ‘self assessment’ schedule where you’re undertaking the inspection yourself, and sometimes even providing cost information. The ATO allows for this under the self assessment rule, however these reports tend to attract greater scrutiny (for good reason) and both the Tax Practitioners Board and Australian Institute of Quantity Surveyors have acknowledge that they are not in favour of this type of report.
Property investors can certainly save on costs where their property does not require an inspection undertaken. However, ensure that your Quantity Surveyor explains the reasons in simple terms, lest you miss out on additional tax deductions.