Session 13 - One for the acccountants - Balancing Charges

Hi Glen

Maybe listen to the webinar again.  I have not ever had to add the depreciation to my gain.  In essense a depreciation is not a cash inflow rather an adjustment in the value of an item that the ATO lets you claim in your tax return.

I think including a depreciation schedule in the contract might be an attraction to a potential investor as they can see when things were purchase etc although not many sellers would have a depreciation schedule as part of a contract, generally I find that you would create your own.  Yes a quantity surveyor would create the schedule.  Alternatively, we have just created our own, a little less precise but fine for our accountant. 

Hope that helps you a bit!
Cherie 

I would like to bump up this post for some additional comments. I am currently selling our first investment property. I was aware of the depreciation balancing charge as we have claimed depreciation against a customised depreciation schedule for our villa over the last 5 years.
However I have not seen a schedule (like Steve describes) written into the contract before. Do I simply state: "The following articles (carpets, tiles, window dressings, cabinetry etc) are being sold for the depreciated value of $X and the balance is the capital appreciation of the remainder of the villa" or something to that effect?
Can anyone share their experience of having done this already and/or the wording they used in their contract? Thanks!

This comment may be a little bit delayed but I thought I might respond for my own benefit as well as anybody else that may be interested. As far as I understand this concept as taught by Steve, the effect of depreciating the building and the fixtures and fittings reduces the 'cost' which in turn increases your 'gain'. For example:

Purchase a property for $500,000 own it for 10 years and claim depreciation of $50,000 ($25,000 for building and $25,000 for fixtures and fittings). Sell the property for $700,000 (excluding all other factors for the purpose of this explanation). Because you have claimed the $50,000 depreciation your building cost is now $450,000 and this has increased your 'gain' from $200,000 ($700,000 - $500,000) to $250,000 ($700,000 - $450,000). The effect of this is that your Capital Gains Tax bill has now increased.

Unfortunately you cannot separate your building depreciation, however by separating your depreciated fixtures and fittings ($25,000) from the property on the contract and selling them separately you can bump the cost back up to $475,000 and reduce your gain from $250,000 down to $225,000 which will reduce your Capital Gains Tax bill. Of course if you have owned the property for longer than 12 months then you are eligible for the 50% CGT discount which would mean your gain would be reduced again to $112,500 ($225,000 x 50%).

So the Net effect including 50% CGT discount and assuming a marginal tax rate of 30% would be as follows:

Option 1: Fixtures and fittings not separated:

GAIN = Sold Price - (Purchase Price - Depreciation Claimed)
GAIN = $700,000 -($500,000 - $50,000)
GAIN =$250,000

CGT Bill = (GAIN x 50% CGT Discount) x 30% Marginal tax rate
CGT Bill = ($250,000 x 50%) x 30%
CGT Bill = $125,000 x 30%
CGT Bill = $37,500

Option 2: Fixtures and fittings separated:

GAIN = Sold Price - (Purchase Price - Depreciation Claimed)
GAIN = $700,000 - ($500,000 - $25,000)
GAIN =$225,000

CGT Bill = (GAIN x 50% CGT Discount) x 30% Marginal tax rate
CGT Bill = ($225,000 x 50%) x 30%
CGT Bill = $112,500 x 30%
CGT Bill = $33,750

The result in selling the fixtures and fittings separately will reduce your CGT Bill by $3750

Would love to hear anyone's thoughts and comments on this.

In regards to the sale contract I would get the accountant to do up a schedule from your depreciation schedule and have the agent or conveyancer/solicitor add it as an appendix condition to the contract.

- Dylan