Tax Depreciation Calculators – Is there merit in the estimates?

Depreciation Calculator

Google is telling us that more and more people are searching for a ‘tax depreciation calculator’. Admittedly, this search ranked well below the top 2016 result of ‘US Election’ and even a few million short of number 6 ‘Pokemon Go’.

Putting the self-deprecating Quantity Surveyor stuff to the side for a moment, searching for an online depreciation estimate is a trend that’s likely to continue. Even so, we’re resisting the temptation to build a calculator. Why? I’m glad you asked.

Online calculators should be fairly accurate in calculating a tight minimum and maximum range for, say a brand-new project home. Yet comparing a few existing calculators online shows that the range between them is not particularly tight at all. I worry that there’s the potential to overpromise and under deliver, in the hope of winning the work.

The project home type property should be the easiest property to estimate of them all, let’s run through an example. (Strap yourself in, perhaps only engineers, accountants and depreciation guys will take pleasure in this.)

Firstly, we need to calculate the total construction cost. From a high-level perspective, the best way to do this is to take the size of the property, and apply industry rates at a cost per square metre. Note that we’re not considering the type of block (sloping etc.).

So, an off the shelf 2016 construction handbook would say a 180 sqm brick veneer home with a medium standard finish in Sydney would cost around $1,175 to $1,265 per square metre. This gives us a construction cost of $211,500 to $227,000.

Let’s assume the $227,000 figure is most accurate. With that we can calculate that it’s impossible to have less than $5,675 worth of deductions within the first full year. Why? Well, the minimum depreciation rate is 2.5% for capital works, so 2.5% of $227,000 is $5,675.

It’s impossible to have less than $5,675 in total depreciation deductions, because we’re talking about a hypothetical house without a toilet. Not just that, but air conditioning, hot water system, cooking appliances, carpets, blinds etc.

In my experience, a house of that value/type would have between $20,000 to $30,000 worth of these types of assets (plant and equipment assets).

This is where the depreciation gets a little trickier. Let’s say there’s $25,000 worth of plant, that means we now must deduct that from the construction cost to adequately calculate the capital works deductions. So, that would be $227,000 minus $25,000 = $202,000 X 2.5% = $5,050.

Then there’s the $25,000 worth of plant items. Some of it will depreciate at 100%, other assets at 18.75%, and some as low as 10%. Carpet will be 20% under the diminishing method and 20% is probably the fairest middle ground for all plant items. So again, trying to stay high level, we’ll call all plant assets 20% on average.

This will give us the following table;

Seems simple enough, and the capital allowances part almost is. Yet the plant and equipment assets will not decline in value the same way each year. Some assets will be gone completely, other assets depreciation rates may change once the value reaches a certain point. All these things must be ‘estimated’ and they make the year 2, 3 and so on calculations a little more complex.

On top of this, right at this very second, we’re completing a report on a 178 square metre home with an actual known cost to build of $365,000! How does the average investor know the standard of finish and even with Miele appliances and plush carpet, how can there be that much variation?

This is where a Quantity Surveyor cannot easily be replaced with a robot, despite some of the personality similarities, and we’re talking about a brand-new home after all. If we’re finding complexity here, how accurate do you think a calculator would be in one of these scenarios;

  1. The client bought the property 15 years ago, it was 8 years old at the time but the previous owner added a deck and converted the garage into a home office.
  2. The client lived in the property for the first 4 years, and wants to assess whether they’ll get sufficient deductions in financial year 5 on their 12-year-old unit in a complex of 78 units with a swimming pool and gym.
  3. The property was built in 1996 in remote QLD and some materials needed to be brought in via a barge. The property was retiled and painted in 2011 after storm damage and has just had an extension to increase the size of the main bedroom and to build an ensuite.

I love the fact that property investors are now much more educated about their depreciation entitlements, us Quantity Surveyors have been educating people for years. It’s important though to understand the limitations of online calculators, and the inherent risk in relying on numbers calculated using a helicopter view and some average data. Once you get past the brand new house or townhouse, things can head in a myriad of directions and costs become much less predictable.

Nothing will beat an actual report prepared by an expert after a thorough site inspection and historical research. However, if you are looking to do your sums on a potential purchase or assess whether a depreciation report may provide some value over the cost, you’d be much better served picking up the phone or sending an email to a recognised tax depreciation expert. The more information you have about the property the better, and the greater the accuracy of any estimate.

Safe calculating!

Mike Mortlock, Managing Director – MCG Quantity Surveyors