In a period of tightening cash-flow, there are old and new ways of ensuring your property investment is providing the best cash return, without increasing the rent or reducing the outgoings.

 

Capital Allowances

Capital allowances are available for any income producing property, new or old. Properties essentially contain 3 components – land, depreciating assets (plant) and capital works (building). If you have purchased, built, refurbished, fitted out or demolished a property there are significant allowances available which will reduce your income tax payable and increase your after-tax return and cash flow. The following examples are based on recent sales and demonstrate the types of deductions available:

 

Property type	Purchase price	1st year deduction	Total deduction
Industrial	$3,000,000	$80,000	$1,750,000
Commercial (suburban)	$5,000,000	$150,000	$2,800,000
Retail (neighbourhood)	$15,000,000	$285,000	$6,800,000

 

 Investment Allowance

The Federal Government announced an additional tax deduction on the 12 December 2008 and 3 February 2009 in the form of a Temporary Investment Allowance. An additional tax deduction of 30% is available to businesses that acquire or commence construction of a new asset between 13 December 2008 and 30 June 2009 with the asset being ready for use by 30 June 2010. An additional tax deduction of 10% is available for new assets acquired between 1 July 2009 and 31 December 2009 with the asset being ready for use by 31 December 2010. The asset must have a cost of over $1,000 for small business tax payers (with a turnover less than $2m p.a) or $10,000 for non small business taxpayers. This deduction is available immediately.

Property Tax Profiling ™

As an extension to the Capital Allowances previously outlined, many of our astute clients engage us to review their property portfolio on a quarterly, half yearly or annual basis to identify additional deductions and allowances. These allowances and accelerated deductions relate to all capital expenditure, repairs, tenancy fitouts and contributions, write-offs of the un-deducted value of demolished items, write-off and future deductions from inherited fitouts, analysis of refurbishments and extensions and re-assessment of effective lives. This unique service ensures our clients are minimising their tax payable and provides a clean and manageable register of assets.

 

Make Good Contributions

One of the most overlooked areas of leases occurs when tenants vacate the property. Most leases contain expressed or implied clauses relating to repairs and maintenance, make good on expiry and redecoration but in many cases the tenant pays insufficient contributions to return the property in a condition as agreed in the Lease. We regularly find that the cost to make good a commercial office space is between $100 - $150/m2 which can be equivalent to 4 to 6 months rent. Single tenant properties, including industrial buildings, often result in a higher claim.

 

Desktop Review

Napier & Blakeley have been providing these services for 25 years and have asset and cost information on over 10,000 properties in Queensland. Our initial consultation including a Capital Allowances Estimate or Make Good Assessment is available on a complimentary basis.

 

For more information contact Shaun Kenafake, Director on (07) 3221 8255 or skenafake@napierblakeley.com.

A number of our articles have covered a variety of individual topics in isolation but in reality they’re all inextricably linked providing the platform for balance and maximum return from your property investments.

 

Our affordability index provides an amalgamation of a variety of property information to provide a balanced look at how your asset might perform over a period of time and how you can influence that performance.

 

Whether the investment is residential or non residential the same basics apply –

 

§          How much is it going to cost me

§          What risks are involved

§          What return will I secure

 

These questions then have multiple layers – how much is it going to cost me initially and in the short and long term, what kind of costs are they, capital, repairs and maintenance, refurbishment or compliance costs. What must I do legally, what must I spend to benefit and retain the tenant.

 

What risks are involved, physical, compliance or tenant retention, who ‘makes good’ the space at lease expiry.

 

How do I maximise and maintain my return and are there development opportunities that will add value to the property.

 

If you consider all of these questions in isolation they provide some useful information.

 

But only by considering all these issues at once you can create a clear picture of how your asset will perform over time, therefore providing certainty, clarity, sound information for a financier and a great platform for your accounts.

 

As an illustration, a commercial investment property is purchased for $5,250,000 the initial return is 8% with annual rental at $420,000. The property has 1,500m2 net lettable area and is ten years old.

 

A lease is in place for 5 years with fixed rental increases of 4% so at lease end – the possible value of the asset at 8% is $6,142,000.

 

Not a bad gain over five years if you can achieve it.

 

However, in addition to debt costs over the lease period, a building of this age will also have other costs associated with ownership over time and these need to be considered, planned and managed to keep the property aesthetically and functionally attractive beyond the current five year lease. No future lease – substantially less future value.

 

The pre acquisition due diligence study provides details of the risk factors associated with the property and notes that the related capital expenditure and repairs over five years is likely to be between $350,000 and $400,000 to carry out works such as Building Code compliance issues, replacement of floor coverings, services upgrades, painting and general upkeep.

 

The cost of capital works and repairs are tax deductible against income but obviously they also have a recurring cash flow impact.

 

Offset against ongoing costs of ownership are the tax deductions available for building allowance and plant depreciation deductions for the initial acquisition and again for additional capital expenditure throughout ownership. These deductions provide additional cash flow and after tax dollars to fund any upgrade works to the asset.

 

The affordability index captures all of the above information and allows you to:

§          Understand, plan and manage all costs associated with ownership.

§          Manage all risks associated with ownership.

§          Manage your true return proactively, by controlling cost and risk and capturing efficiently all available tax benefits.

 

So not only can you afford it, you can maintain a solid return as well with no surprises.

If during the current financial year you owned an investment property and earned an assessable income from it then you are entitled to tax deductions for wear and tear or depreciation as it is more commonly known.

 

Over the last 22 years Napier & Blakeley has analysed many thousands of properties, preparing depreciation schedules for owners of virtually every type of property ranging in value from a few hundred thousand dollars to in excess of one billion dollars in value.

 

There are well in excess of one million property investors within Australia and we suspect that the majority of property owners in Australia do not fully maximise the deductions which can significantly affect and increase their after tax yields.

 

In a recent analysis of a five year old commercial office building with a purchase price of $5m, a land value of $1m and an income of $500,000 we found the following.

 

If you claimed no depreciation and building allowances, your after tax income at the following rates would be:

 

                45 per cent = (highest individual tax rate)                       =$275,000  

30 per cent = (company tax rate)                                      =$350,000

15 per cent = (superannuation fund tax rate)                 =$425,000

 

However, if you did claim the available deductions, your after tax income would be greatly increased as follows:

 

45 per cent =$365,000       giving a 33% increase in after tax return         

30 per cent =$409,000       giving a 17% increase in after tax return         

15 per cent =$455,000       giving a   7% increase in after tax return         

 

As with lifes two certainties, death and taxes, we can guarantee you that if you don’t claim these available allowances, the ATO wont go out of their way to let you know what you’re missing out on!

 

Below are some questions you should ask yourself to see if you have passed the yearly Tax Depreciation rego:

 

o         Have you acquired an investment property of any age, type or state of repair?

o         Have you completed any construction works ?

o         Have you completed a fit out ?

o         Has a tenant left your property and you have inherited their fit out ?

o         Has a tenant left your property and you have removed their fit out and made good ?

o         Have you paid any $ towards a tenant fit out

 

If you have answered yes to any of the items in the tax depreciation rego form and have not considered that there could be tax deductions available to you. N&B can assist with getting your Tax Depreciation rego certified and in order for the last financial year.

The dynamics of the property market have changed considerably over the last few months, interest rates are higher, debt is more expensive, credit is harder to get, and equities have been savaged – but in all this uncertainty their remains a true constant that provides real benefit to property investors – and it’s provided by the ATO.

 

Both investment property cash flow and after tax return can be significantly increased by  correctly establishing the basis for depreciation schedules at the point of acquisition, and then by really managing available deductions throughout the life of a property.

 

Napier & Blakeley are the original specialists in this area and our PTP – “property tax profiling” establishes a basis for deductions and then analyses further capital expenditure through refurbishment or redevelopment, repairs and maintenance and the area that is usually always missed, write offs for demolished items.

 

Items of both plant and building that are demolished or replaced during a financial year can be written off at 100% of their remaining tax value as at the time of demolition or destruction.

 

It’s therefore critical to correctly establish base values from which to work and catalogue all changes throughout the year – there is true value in doing so.