Which quantity surveyor reports can help you plan and save more money on your investment property?
Hey everyone, Tuan Duong, Founder of Duo Tax Quantity Surveyors here
for yet another video designed to help you become a better property investor.
In this video, you’ll learn that we’re not just pretty faces who only produce tax depreciation
reports. We also produce two other reports, capital gains reports and also cost reports.
Most people know about architects’ roles but aren’t always aware of
the critical role a quantity surveyor plays in construction cost management.
So, you’ll definitely want to listen carefully if you’re planning to build a house
or if you’re looking to maximise your depreciation deduction claims.
Before we get into it, we want to be clear that this video is for informational purposes only.
In no way should you interpret this as tax advice. We always recommend you working with
an accountant or tax agent who can give you the best advice for your situation.
Now let’s get some experts in to talk about these reports.
Number One, Capital Gains Report.
Capital gains tax can affect the return on your investment in a big way.
Capital gains is the profit you make when you eventually sell your property. The ATO
considers this income, so you have to pay tax on that profit, which is capital gains tax.
If you’ve owned your property for at least 12 months, you qualify for a 50% discount on
the capital gain tax you have to pay. But in most cases, the other 50% can still be a lot of money.
Luckily, it is possible to further reduce the
capital gains you have to pay through a Capital Gains Report.
For example, you did some renovations on your investment property but didn’t keep a record of
the total costs. A quantity surveyor can work out these costs to increase your capital cost base.
Let’s take Mary’s renovations as an example.
Mary bought a house in 2006 for $600,000 and sold it in 2019 for $1 million. So her total
capital gain was $400,000, but she only has to pay tax on $200,000 because of the 50% discount.
After talking to a Duo Tax quantity surveyor, she realised that she hadn’t considered
the renovations she did in 2017. The quantity surveyor drew up a capital
gains report that showed that the renovations’ total cost was $150,000!
So, her capital gain is now $250,000 instead of $400,000. After the capital gain 50%
discount, she now only has to pay capital gains tax on $125,000!
Without the report, she would have had to pay tax on 75,000 more dollars!
Number Two: Cost Reports
The first step of building a new home
is to have your development application approved by the Council.
To do this, you’ll need to first get yourself an estimated cost plan report. A cost plan is a
helpful tool to manage costs through all project stages. It’ll help provide you with an idea of
the total cost of the project, and also helps as a comparison tool when looking for contract tenders.
Quantity surveyors like us can prepare these cost reports using cost data
from supplier’s quotes and previous projects. This way, the estimates are accurate and consistent.
Next, you’ll need a council report. This report gives the council an idea
of how much the project’s cost will be, to calculate your contribution levy. The
levy is calculated based on a percentage of the total estimated development cost of the project.
In certain councils, if your development cost estimate is more than the council’s limit of
$500,000, then you’ll need to submit a council cost report to verify the construction cost.
Without a quantity surveyor preparing this report,
you may risk paying higher contribution fees to the council than you need to.
You may even run the risk of undervaluing the costs payable to the council.
It’s also becoming more common for banks to ask for an initial cost report
when applying for a construction loan. Once the loan has been approved,
they usually also require a “work in progress” report to release the correct amount of money.
A Duo Tax bank report will factor in: 1: an initial cost report.
And 2: a progress drawdown claim which verifies what has been completed on site.
This will help the banks with managing your loan,
and help you draw up a budget to make sure your project doesn’t blow out.
The last of the cost reports is an insurance replacement valuation.
This report provides an accurate replacement cost of the property in the event of any
loss or damage. Insuring a property is not as simple as just covering the construction costs.
An accurate insurance replacement valuation takes into account demolition costs,
reconstruction time, replacement costs based on current market rates,
cost escalations, and all professional fees.
Having your property covered for the correct amount protects you in the event of any loss
and damage, and also ensures that you aren’t paying insurance premiums that are too high.
Tax depreciation reports And of course, what most
people know Quantity Surveyors for tax depreciation schedules.
One of the most notable tax deductions you can claim is on the depreciation
of your property. But at least 70% of property investors don’t buy a tax depreciation report.
I see so many investors miss out on the opportunity to save thousands of dollars
each year because they don’t realise the cash flow benefits of getting a tax depreciation schedule.
Claiming depreciation involves identifying the value of a property
and all of its fittings and fixtures. Quantity surveyors are one of the few professionals
qualified to assign values to your assets.
After inspecting your property, the quantity surveyor will draw up
a depreciation schedule that outlines your Division 40 and Division 43 assets’ value.
Division 43 refers to the depreciation of the building structure, and Division 40 relates
to the fixtures and fittings found inside the building like carpets or air conditioning units.
To find out more about depreciation, check out our video covering all the depreciation basics.
The purpose of a depreciation schedule is to show you how much your building has depreciated
and how much it will continue to depreciate over time.
This will give you a clear idea of how much you can claim.
Let’s look at Ted’s example.
In February 2020, Ted purchased his first investment property for
$375,000 and immediately rented it out.
Based on the report he obtained from his Quantity Surveyor at Duo Tax,
his property’s construction started in March 2003
and was finished by November 2003. The estimated construction cost was $225,000.
The depreciation schedule outlines that Ted can claim a capital works deduction at a depreciation
rate of 2.5% each year, as the construction of his property began after 15 September 1987.
In his first year of owning the property,
Ted could only rent out the property between 1 February 2020 and 30 April 2020.
He can claim a deduction for 90 days. The calculation involves multiplying the cost
of construction by the depreciation for the number of days that the property was rented out.
So, by only having to cover the schedule’s cost,
Ted could claim a depreciation deduction of $1383.20 in his 2019-2020 tax return.
What’s even better is that Ted can continue claiming these deductions until 2043
as long as he still owns the property and is being used to produce income,
because a depreciation schedule is valid for 40 years!
So, there you have it, all the reports our quantity surveyors at Duo Tax can help
produce. Hopefully, you have a better understanding of how they can help you.
I’m Tuan Duong, I’ll see you next time!