1.
RENTAL PROPERTIES AND BUILDING DEPRECIATION
The following discusses some points
in relation to the depreciation of business related
premises
If my property
was built before 1985, is it too old?
No. It is worth noting
that:
Why is plant and
equipment
itemised?
The ATO specifies an individual
effective life for each plant and equipment item. Consequently, reports show the
estimated cost for each item and its contribution to the depreciation total
per financial year. The
original building structure and capital improvements, are all written off at the
same rate (unless building works have been completed over different legislation
periods). Therefore individual costs for these items aren't expressed in the
report.
Why does the
depreciation and capital allowance schedule only last 40
years?
From the date of construction
completion, the ATO has determined that any building eligible to claim the
building write-off allowance has a maximum effective life of 40 years.
Therefore, investors can generally claim up to 40 years depreciation on a brand
new building, whereas the balance of the 40 year period from construction
completion is claimable on an older property.
Can I claim
renovations completed by the previous owner?
Yes. Anything in the property that
is part of a previous renovation can be estimated by a quantity surveyor and
deductions calculated accordingly. This includes items that are not obvious e.g.
new plumbing, water
proofing, electrical wiring etc. For capital improvements to qualify for the
building write-off allowance, they must have commenced construction within the
appropriate time periods.
What information
do I need to provide?
Information required to produce a
Tax Depreciation and Capital Allowance report includes the
following:
What is the
difference between plant and equipment and the building write-off
allowance?
Plant and equipment items are items
that can be 'easily' removed from the property as opposed to items that are
permanently fixed to the structure of the building. Plant items also include
items that are mechanically or electronically operated, even though they can be
fixed to the structure of the building. Plant and equipment items include (but
are not limited to):
The building write-off allowance
(otherwise known as Division 43) is based on historical building costs and
includes things such as the bricks, mortar, walls, flooring and
wiring.
Who is qualified
to estimate construction costs for depreciation
purposes?
Quantity Surveyors are one of the
few professionals recognised by the ATO
to have the appropriate construction costing skills to calculate the
construction cost for the purposes of building depreciation. Construction costs
are estimated in today’s market and historically adjusted to the year of
construction using cost indices.
What is
pooling?
A low value pool exists providing
investors the benefit of pooling items that meet either of the following
classifications:
low Cost Pool : A low cost asset is
a depreciable asset that has a cost of less than $1000 in the year of
acquisition.
low Value Pool : A low value asset
is a depreciable asset that has a undeducted value of less than $1000. That is,
the cost of an asset is greater than $1000 in the year of acquisition but the
value remaining after depreciating over time (opening value less deductions in
year 1 less deductions in year 2 etc) is now less than
$1000.
Assets meeting both these
classifications can be placed in an
itemised pool. Pooling is used in
conjunction with the diminishing value method to
maximise deductions in the initial years of
the depreciation
schedule.
A Building
is?
The age of the building can be
determined by obtaining council documents with dates pertaining to the original
application approval date or the Occupancy Certificate date and final inspection
date. These include historical council searches regarding lodged development
applications, as well as Occupancy Certificates and certified final
inspections.
Construction Cash
Flow - Hidden Expenses
When a developer and the head
contractor agree on a contract for a development project, the developer may not
realise
the impact this decision may have
later in the construction phase. It is quite common for the signed contract
between the developer and the head contractor to stipulate that payment for
materials will be made to the contractor once materials have arrived onsite.
However, this clause may become a financial burden for the developer when they
in turn attempt to have funds released from their nominated financial
institution.
Most finance agreements between a
developer and financier will state that materials must be fixed to site in order
to release payment. This can result in materials being delivered to site (but
not yet fixed or installed) and the financier not releasing funds to-cover these
incurred costs.
From a financiers point of view,
this clause significantly reduces the risk as they have not paid for materials
which are not fixed to site. It also provides the financier with a more accurate
indication of the cost to complete the development.
A quantity surveyor can provide
Development Check Estimate reports and an independent assessment of all
contracts relating to a construction project. Obtaining advice in the planning
stage of a project may reduce the financial burden caused by contractual
obligations once in the
construction phase.
Source : BMT &
ASSOC
2.
LARGE BUSINESS
PRESSURE
Unfortunately, some players in the
market seek to gain an unfair advantage over smaller operators by using their
larger size to pressure other businesses. The use of harsh or oppressive
behavior can amount to what is known as unconscionable conduct. There are no
hard and fast definitions used to define unconscionable conduct, although court
rulings on the issue have provided some direction.
One area where unconscionable
conduct can become somewhat of an issue for franchisees is in leasing retail
space. The issue of leasing by a franchise system is generally complicated by
the fact that there are three parties involved-the landlord, the franchisor and
the franchisee.
Successful franchisors always
bargain hard for the interests of their franchisees to achieve
the
best possible rental outcome. This
is not always easy as the franchisor is generally dealing with a landlord who
has an advantage in bargaining power.
Franchisor representatives have
complained about difficulties in securing reasonable terms when negotiating
lease renewals with major landlords. Franchisees for their part often feel
disempowered and poorly informed about processes leading to revised rental
terms. Sometimes the franchisees claim they are being squeezed out by new rental
rates. There are also situations where the franchisor tries to unfairly use the
lease as leverage against a franchisee during a
dispute.
Landlords must act fairly towards
their tenants, or risk running foul of the Act. There are a number of ways that
some landlords, including franchisors sub-letting to franchisees, have in the
past attempted to use leases to pressure their
tenants.
Like all franchising disputes, the
best and most effective way to settle complaints is through good communication
and identifying problems early. The vast majority of franchisors
genuinely recognise that their
own success rests on helping their franchisees to succeed, but there are always
a few black sheep who seek to tip the balance of power their own way by putting
undue
pressure on franchisees. Using their
position in respect of tenancy arrangements can be one of the ways to do this.
Equally, landlords need to act fairly in their dealings with franchise
tenants.
The ACCC's attitude is that both
sides have rights during disputes, and when one party attempts to use its weight
to resolve issues, that may be considered unconscionable conduct. Apart from
bargaining strength, issues that may cause concern
include:
·
whether the stronger party imposed
conditions that were not necessary to protect their legitimate business
interest
·
the use of undue influence or
pressure tactics whether the stronger party made adequate disclosure to the
weaker party
·
the willingness of the stronger
party to negotiate
·
the extent to which each party acted
in good faith
·
the requirements of any relevant
industry code.
In 2001 the ACCC took court action
against a South Australian master franchisee who sought to punish a franchisee
they were in dispute with by attempting to change the condition of a lease. The
franchisee had been renting the site to run a cake shop, while at the same time
sub-letting another section of the site to another business. The landlord, who
had originally agreed to the sub-let arrangement, refused to allow the
franchisee to continue sub-letting the site, allegedly as punishment for a
dispute between the two parties. The Federal Court found that the franchisee had
relied on rent from the sub-let to maintain a viable business. The master
franchisee, knowing this, had allegedly sought to punish the franchisee by
removing the ability for the franchisee to carry on the sub-let and therefore
maintain their business. The ACCC took the case to court and the landlord was
ordered to pay compensation of $10 000 to the
franchisee.
Source
:ACCC
3.
AUSTOCK SHARE
REPORT
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Disclaimer
This document is intended only to
provide a summary of the subject matter concerned and does not purport to be
comprehensive or to render specific advice. No reader should act on the
basis of any matter contained in this document without first obtaining specific
professional advice