In particular, all your expenditure and capital allowances must be recorded, apportioned correctly and accurately in accordance with the current legislation.  If you have made some profit in selling your investment property this financial year, the transaction may have resulted in a capital tax gains (CGT) event, and if not treated properly could result in a larger tax payment due than originally thought.  You must also have sufficient evidence your property was income producing thus providing you a trigger to claim any deductions.  Refer to the following link for a detailed explanation of what you may require for EOFYS 2016 on your residential property:  https://www.ato.gov.au/General/Property/Residential-rental-properties/

If you have a holiday home the ATO will be right on to you as well, especially if you have not declared any income but claimed deductions throughout the year. If you have some income, you may need to apportion your deductions with regards to private use and investment/rental use.  Refer to the following link for a detailed explanation of what you may require for your EOFY 2016 return:  https://www.ato.gov.au/General/Property/In-detail/Holiday-homes/

Should you wish to discuss your property and ensure you are maximising your tax deductions with the correct legislation categories and therefore increase your after tax cash position, please do not hesitate to contact any of our Property Depreciation Managers throughout Australia.

Remember, before the game changes again, June 30 is only a couple of months away, so get your property investments sorted early and maximise your claim while you can.

Have a safe Easter and beware your waist will not depreciate if you have too much chocolate!

Paul Mazoletti
National Tax Director

Lack of Capital post GFC has lead to a significant neglect of R&M and Capex spend.

Having worked on property due diligence valued over $10B since the GFC, Napier & Blakeley have seen only nominal spend on upkeep compared with previous years.

Risk of Non-Compliance (i)

During this period the increasing trend has been a notable reduction of Repair and Maintenance (R&M) and Capital Expenditure (Capex)  budgets. Whilst this strategy may have been necessary in some circumstances e.g. postponement of non-essential Capex, we have found too commonly evidence of non-compliance regarding statutory maintenance such as testing, auditing and reporting of essential safety measures and fire safety systems.

Reduced Life Expectancy and Premature Capex 

Recent technical due diligence and condition assessments have also found that the lack of R&M and Capex budgets for economic life driven plant and equipment overhauls and refurbishments has resulted in increased short and medium term Capex.

To put this in context, without appropriate R&M, major plant items may have an economic expected life of (say) 25 years, however, the reduction or removal of maintenance can result in a major shortfall in expected life to around 15 years.

The Reaction

Astute purchasers have become aware of this risk and look for these patterns in their technical due diligence reporting to ensure that appropriate Capex costs are factored into the purchase price to account for a vendor’s R&M expenditure shortfalls.

Condition assessments, maintenance reviews, energy assessments and risk weighted strategic Capex forecasts have become 2010’s essential tools for good asset and facility management and sustainable property solutions.

Risk of Non-Compliance (ii)

Legislation requires that most commercial office property will be required to have a formal energy performance rating in the next few years and many will require this imminently or in the next few months.

This Legislation has caught most by surprise.

For purchasers and owners it is now important to understand where a property currently sits from a formally rated energy performance perspective.

It is also important to understand how the rating can be maintained at the same level over a period of time, and how it can be strategically and cost effectively improved to avoid future obsolescence.

The Building Energy Efficiency Disclosure Act 2010 is on the cusp of taking effect. The transitional provisions (1 November 2010 to 30 October 2011) require the disclosure of a building’s energy performance through a NABERS Energy base or whole building rating, for all commercial office property with a net lettable area of 2,000m² or more that is offered for sale or lease. However, with only 388 commercial office buildings registered nationally to date, it would seem the message may not have reached all concerned parties with property interests that fall under the Act’s disclosure requirements.

Anxious Vendors

With fines in excess of $110,000 for breaches of the Act’s obligations; including advertising the property for sale or lease, after 1 November 2010 without an appropriate NABERS Energy rating, there is significant anxiety in the market place.

The latest information from the Department of Climate Change and Energy Efficiency (DCCEE) will surely increase anxiety levels, as they have confirmed that neither exemptions nor extensions will be granted for lack of knowledge or where assessments are currently underway but not yet completed.

It will be interesting to see how owners, selling and leasing agents and DCCEE react.

Astute Purchasers

The story doesn’t end once the rating has been achieved. Purchasers want to know about the processes and procedures that owners have in place, the potential risks of maintaining the rating at the current level and what plans are in place, or could be implemented, to improve the rating, perhaps strategically in line with planned Capex or future lease expiries. Such initiatives are considered in terms of funding opportunities, reduced energy costs, pay back periods and commercial outcomes.

For more information on Technical Due Diligence, Capex Forecasts, NABERS Ratings and Sustainable Property Solutions contact Napier & Blakeley.

NSW / ACT / WA / NZ  -  Alastair Walker  -  02 9299 1899
VIC /  SA  / TAS  -  Peter Frith, Rob Howells -  03 9915 6300

Napier & Blakeley have prepared depreciation schedules for property investors for over 25 years and are the most knowledgeable company in Australia in this space, having introduced this service to the Australian property market and developed it into what it is today.

Our clients are many and loyal and are always impressed with our expertise and our efficiency, maximising their after tax property returns, creating more free cash flow and actually assisting them in structuring and managing the future of their asset.

Every year we are ready at this time of year to deliver your property depreciation needs efficiently, as we know it is tax time and we understand what investors need and how to assist them with their annual returns.

Investors can claim on most income producing property, large or small, young or old.  If you’ve bought, renovated, extended, or even demolished all or part of it, there may be claims to be made that will assist you with your tax and therefore your free cash flow going forward.

If you are in any doubt or not sure what to do … ring, email or write to us and we will help.  We can tell you what you will get before you get it, we will guarantee our results and we will help you should you ever be audited.

It’s our early Christmas present to you – a Depreciation Schedule – the gift that keeps on giving.

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.