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The ATO have audited in detail depreciation schedules that Property Wealth Australia (formerly trading as Meridian Property Consultants) has prepared for one of our clients.
We were engaged by a firm of Accountants to prepare Tax Depreciation Schedules on behalf of their client who own and operate Hotel and residential accommodation. Our reports were heavily scrutinised by the ATO and found to comply with the legislation in every respect. In a previous article titled:
“Plant & Machinery Valuations - How do you know if your Quantity Surveyor is doing a good job?”
We explain how we undertake plant and equipment valuations in relation to tax depreciation schedules and the importance of engaging a correctly skilled Quantity Surveyor. It is vitally important to deal with an appropriately qualified consultant as a failed audit could have resulted in substantial penalties! Can you afford not to be dealing with us?
Read the full ATO report about our Meridian Depreciation Schedules below:
AUSTRALIAN TAXATION OFFICE
REASONS FOR DECISION
CLIENT
Audit reference Number: xxx
The period covered by this report:
Year ended 30 June 1997
Year ended 30 June 1998
Year ended 30 June 1999
Year ended 30 June 2000
Year ended 30 June 2001
Year ended 30 June 2002
Year ended 30 June 2003
Year ended 30 June 2004 Issue 1
(a) That the expenditure was actually made and the quantum accurately recorded or estimated?
• During the CLIENT review of the clients affairs, they became aware that the claim for Division 43 building allowance included amounts expended on furniture and fittings, which are depreciable plant rather than buildings;
• They were unable to obtain the original receipts and invoices from you or your previous tax agent;
• They instructed a Quantity Surveyor, Paul Palella, trading as Meridian Property Consultants, to adopt the same total cost as claimed, and then to allocate this cost between construction of the units, and furnishing them;
• On receipt of his report, the CLIENT calculated an amended claim for depreciation based on the estimated cost of furniture and fittings;…………
(b) That the claim for depreciation/capital allowance was correct in law.
In law, Division 40 of the ITAA provides for the depreciation of the cost of plant used in a business, in recognition that the plant will decline in value with use. In general, land and buildings are considered not to decline in value, and are not eligible for depreciation.
However, Division 43 of the ITAA provides for a write-off at a rate (generally lower than depreciation) for commercial property, particularly hotels and short-term commercial accommodation. It is appropriate that the cost basis previously claimed as Div 43 write off should be correctly divided into building cost and furnishing cost and appropriate rates allowed.
(c) That appropriate depreciation rates were selected
Depreciation rates were selected by the quantity surveyor, and the tax agent’s claim is based on this. Depreciation rates are determined by the Commissioner of Taxation in ruling IT 2685 (for plant first used or installed prior to 1 January 2001) and in ruling TR2000/18 (for assets used or installed after 1 January 2001).
The Quantity surveyors report expressly adopts the depreciation rates prescribed in Taxation Ruling IT 2685. A spot check of the rates claimed shows that they match with this ruling.
Division 43 rates were selected by the Quantity Surveyor with reference to the provision of the ITAA 1997.
(d) That calculations were correctly made
The claim was based on values allocated by the Quantity Surveyor to the plant in the motel, and correct depreciation rates were applied to this plant as prescribed by IT 2685. From these values and rates, the tax agent prepared a schedule of depreciation and calculated the variance between the schedule and the amount already claimed. The amendment request is based on that variance.
Issue 2
Were claims were correctly allocated across years of income?
Your tax agent lodged a claim, which was based on then total variance in depreciation claimed by your previous agent, and the amount, which they now calculated, was correctly allowable according to the values estimated by the Quantity Surveyor. This claim was made in reference to the years ended 30 June 1997, 1998, 1999, 2000, 2001 and 2002.
What you have argued:
You maintain that your claim for depreciation should be increased because your previous tax agent included the cost of plant, furniture and fittings as part of the construction cost of the Motel Apartments, and claimed the total cost as division 43 building allowance. You maintain that the cost of plant furniture and fittings should instead be allowed as depreciation at the proper rates.
You maintain that the Quantity Surveyor’s report prepared by Meridian Property Consultants (now trading as Property Wealth Australia Pty Ltd) is an accurate estimate of the cost.
You maintain that the depreciation schedules submitted by your accountants, are prepared from the quantity surveyors report and are based on the values in that report and appropriate rates of depreciation have been applied to those values.
OUR DECISION:
CLAIM FOR DEPRECIATION IS APPROPRIATE AND APPEARS TO BE ACCURATELY ESTIMATED
Why we have made this decision:
Issue 1(a)
That the expenditure was actually made and the quantum accurately recorded or estimated. Quantity Surveyor’s report, and further enquiry with Quantity Surveyor, is accepted as evidence of the correct apportionment of the expenditure.
Issue 1 (b)
That the claim for depreciation/capital allowance was correct in law
In law, Division 40 of the ITAA provides for the depreciation of the cost of plant used in a business, in recognition that the plant will decline in value with use. In general, land and buildings are considered not to decline in value, and are not eligible for depreciation.
However, Division 43 of the ITAA provides for a write-off at a rate (generally lower that depreciation) for commercial property, particularly hotels and short-term commercial accommodation. It is appropriate that the cost basis previously claimed as Div 43 write off should be correctly divided into building cost and furnishing cost and appropriate rates allowed
It is accepted that the allocation of values by the Quantity Surveyor is appropriate.
Issue 1 (c)
That appropriate depreciation rates were selected
Claim was checked against rates as prescribed by the Commissioner.
Issue 1(d)
That calculations were correctly made
The Quantity Surveyor’s list was checked against the depreciation claim. Correct values and percentages were used. Private use percentages were not required. Adjustments were made for part year use where required.
Spot checks were made of a number of items, and a depreciation schedule was re-created from the Quantity Surveyor's report and reconciled to the tax agent’s claim.
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