My favourite QS BS – The top three furphies spouted by the depreciation industry

As a Quantity Surveyor or QS if you will, I have the pleasure of a little inside information when it comes to reading some of the articles or catch phrases written by other quantity surveyors.

Quantity SurveyorNo sour grapes here, for the most part we all get along.

I have some great relationships with a number of owners of QS firms, some I consider genuine friends.

However, it’s probably about time I call out some of the BS (I’ll let you figure that acronym for yourself) that has been spouted for years by depreciation companies.

I think as an industry we can do better, and I just can’t stomach BS statistics and people being misled.

So, here’s my top 3:

1. 80% of property investors are not maximising their depreciation deductions

What a great statistic, it’s a shame it’s not based on any research or indeed, true.

I’m not quite sure exactly where this line came from but if you google it as a phrase, you’ll see it quoted by major media outlets and property businesses.

I’m talking the big names. 

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Why am I calling BS?

A number of reasons namely;

  • This research cannot be found. It’s often prefaced by “research suggests” but see if you can find it yourself. I’ve spent many an evening trying (tip: decline an invite to a dinner party at my house if the situation ever arises).
  • This number has never changed, yet this has been flying around the internet for at least a decade.
  • Given all the attention given to this statistic, shouldn’t that number be dropping? Have the people that started saying this failed in their mission?
  • I’ve spent over a decade educating people on depreciation entitlements. It hasn’t just been me either. Far more important people and businesses have been doing the same, like accountants for example. I can tell you anecdotally that investors are so much more educated about depreciation than ten years ago, and that knowledge is increasing.

It would be great if we could just agree that this line has had its decade in the sun and maybe come up with some new material.

2. The average deductions investors can claim in the first full financial year is around $5,000 to $10,000.

Firstly, look at the language of this one.

Anyone else have an issue with the word ‘around?’

This one actually led me to set the record straight.

If you can excuse a little trumpet blowing, I embarked on a mission to find the exact figure a few years ago.

We analysed our latest 1,000 residential depreciation schedules and found that figure to be $9,183.

We were the first quantity surveyors to ever publish actual average deductions, along with a number of other statistics.

Ok so that figure fell within the range, but it depends on the time period.

We ran a similar test of reports completed after the budget changes to depreciation and came up with a different number, one of which was above $10,000. Surveyor

The problem is the lack of actual information.

Whilst I’ve not yet had the time to publish a whitepaper on our research, at a moments notice I can have it independently confirmed.

Additionally, when you conduct this research you also encounter the problems with it.

For example, we’ve had clients only want division 43 or building only schedules done, when they were actually also entitled to plant deductions.

We excluded this from our research because it was out of line, or to put it another way, not a true representation of what that investor was actually entitled to.

There are a number of other examples I won’t bore you with, but as we share this data, we’ll note some of the criteria applied to it in the small print.

3. You can claim up to 60 percent of your investment property purchase price as depreciation

This is one of the worst ones, and you’ll see that number change.

The Australian Institute of Quantity Surveyors (AIQS) has warned us that factoring the purchase price into an estimate of the depreciation is not the correct methodology or starting point.

So, this percentage is fairly meaningless. Randwick Sydney

Take for example a house built in the 1960s in Sydney with no renovations and a view of the harbour.

In fact, we did a report on a seven million dollar house in a similar condition and the deductions we’re just getting us across the line.

In percentage terms we’re talking 0.02% of the purchase price.

Now consider two units within the same block.

One has a view of the water, the other a carpark.

The depreciation should be the same if all other things are equal, but as a percentage of the purchase price they’re worlds apart.

That’s why I tell people that this percentage of the purchase price is not a metric that should be relied upon at all.

Now, why is it garbage? Property Valuer

What they’re saying is that up to 60% of your sale price is likely to be building and plant and equipment items.

What I don’t understand is the cap.

There’s no legislation to say there’s a maximum percentage of the purchase price.

Consider an out of line or distressed sale, and these are fairly common with commercial properties.

Or even a house sold to a family member cheaply.

Some accountants have argued with me on this, but I’ve prepared schedules where the deductions were higher than the purchase price?

Why?

We estimated the construction value of the property, and we didn’t care what someone paid for it. Gn4 Dat 9644487.jpg The Latest House Price Report By Daft Found That The Average House Price In The City Is Now 181 000 Which Is 52 Percent Above Its Lowest Point

If you bought a brand new shopping centre for ten million but it cost eleven million to build then good for you, but your purchase price didn’t change the construction cost.

I’m no accountant and maybe they weren’t comfortable using our estimate, but we stand by it and are called upon as expert witnesses in court due to our expertise in this field.

You can see the results of those cases as public record.

Maybe, and this is a real stretch, but maybe research could show that 60% is a reasonable average, but I’m not about to conduct that as I see it as a huge waste of time as it cannot be used by investors as a guide on a case by case basis.

I’m going to cap it at three BS numbers, lest this become mad tirade but do me a favour and call out this stuff when you see it.

It’s lazy, tired, misleading and about time we started questioning some of the things we read.

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About

Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular speaker and commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at Visit www.mcgqs.com.au


'My favourite QS BS – The top three furphies spouted by the depreciation industry' have 5 comments

  1. Avatar for Property Update

    August 2, 2018 @ 7:31 pm Mike Mortlock

    Hi Alex,
    Thanks for the comments, some great points and I appreciate you taking the time to make them.
    You’re right that capital deductions will impact CGT, but with 50% exemptions available, then your marginal rate coming into play, combined with the time value of money, all that adds up to the reason why people still claim capital deductions. So it’s not quite a kicking the can down the street situation in my view.

    We’re not trying to lead someone into having a schedule when they can find out cost information themselves, that’s just not the sort of business I want to be involved in. You’re right that occasionally you’ll have records stating costs of works as part of a development application but it’s commonly not available and most of the time it’s an estimate from the owner at the time (often trying to underestimate the value to minimise application fees). Then there’s a huge amount of works down that never even get council approval, especially internal works like bathrooms and kitchens which can be high value improvements.

    The ‘reasonably assessed’ point is a tricky one, I’ve heard accountants referring to that as ‘ticking the audit me box.’ Certainly people are entitled to assess their own effective lives and the like, but very people are actually qualified to estimate construction costs.
    Thanks again for the comment

    Reply

    • Avatar for Property Update

      August 6, 2018 @ 10:33 pm Alex

      Hi Mike, I like your point that you don’t want to be a part of the problem when the depreciation schedule makes little sense in personal client’s circumstances. Unfortunately maximising tax deductions becomes a holy mantra for QS BS people regardless if extra capital deduction makes any sense over a costs of claiming. Some QS BS folks don’t bother asking if a property is jointly owned and if one owner no longer works. Surprise-surprise .. they may keep selling the valuation of carpet and curtains even after a property was contracted after 9/5/17.
      One myth is worth discussing is that professionals make less errors than individuals. The ATO statistic actually shows otherwise – see ABC article from 12 July 2018 “Tax dodgers and fudgers cost Federal Government $8.7 billion in a year”. It is classical 90/10 rule. Individuals who use online tax tool and follow annual ATO publication “Rental properties” can claim 90 % deductions right. It is the rest of 10% marginal claims often hinted by QS BS agents become the “audit me tickbox”. For example if you’ve installed new hot water unit in a rental property you know both parts of its cost from invoices – no valuation is required. But claiming the residual cost of the old one in three or even four digits format is the “audit me tickbox”. You see, if the residual cost of the scrapped 20 year old broken HW unit is less than say $600, then how QS BS person justifies their $200 fees assessing it? Is it not better to claim the actual costs of its disposal without bothering to value it and wearing the costs and audit risks?

      Reply

  2. Avatar for Property Update

    August 2, 2018 @ 6:11 pm Nol

    Hi Mike, it’s been a while.. some interesting evening reading.. Agree with some of your comments but.. to clarify, the 80% comes from a campaign we ran some time ago offering accountants a free review of any existing depreciation claims not being prepared properly. We wanted to help property investors improve their cash return while also calling out some of the substandard depreciation claims provided by some of our industry. We reviewed hundreds of depreciation claims over a short period of time. This campaign gave us some great insights so we like to keep track of the statistic. At the time we published our findings but were quickly swooped upon by a number of competitors who referenced a point in the AIQS code of conduct around publicly calling out other members. We haven’t run that campaign for many years however.. we (BMT) do regularly work with the vast majority of Australian Accountants who now do the work for us. They see a lot of depreciation schedules which have been unknowingly commissioned by their clients via some tricky (usually online) marketing and heavy discounting. When accountants see these they usually send them to BMT and then engage us to redo the report properly. It’s not hard to keep track of how many of these we do and sometimes (20% of the time) we call the accountant back and say no, the claim looks okay this time, deductions have been maximised, it appears to be tax office compliant and you should use it. Why is it still 80%? Keep in mind it does jump up and down at times and this is a percentage so the sample size changes too.. some months lower some higher but over time it always seems to hover on that 80% mark. I think also because unfortunately our industry historically doesn’t have enough barriers for entry, any small operation can look big and professional online, use some fancy web design and AdWord campaign to trick property investors into a cheap and often nasty depreciation schedule. In the last few years we’ve actually seen an increase in the number of small inexperienced operators enter our space. My feeling is that this will diminish with the legislation changes making things a little harder. Thankfully though, accountants can usually tell the difference between a good and bad depreciation schedule and that’s when they call BMT. The problem for the investors is that they have sometimes already been stung and paid for their report. We have been working with the AIQS, ATO, NTAA and practitioners board to make efforts to clean this up, some progress has been made but not enough. Cheers, Nol BMT Tax Depreciation

    Reply

  3. Avatar for Property Update

    August 1, 2018 @ 8:40 pm Alex

    Unfortunately Capital Deductions (CD) will add up at the time of repossession and it will maximise CGT. So CD is more a tax shifting tool rather than pure “deduction”. Psss… the cost of building work for many properties built in the past two decades can often be found at the local council for a small fee. For older properties I’d question the value of such deduction given the small original cost vs ongoing costs of claiming it (surveyors report, accountant costs etc). Unfortunately costs of second-hand depreciating assets (plant) can no longer be claimed for recently acquired properties. For properties contracted before 9/5/17 plant could be assessed at the time of the purchase and included in the contract or even reasonably assessed by an owner. You can always pay someone else to do it for you, albeit “peace of mind” is both expensive and very volatile commodity.

    Reply


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