Did you know that there are two different methods of calculating the depreciation deductions for the plant and equipment items that are inside your investment property?   There are and one gives you a quicker return in the critical first years of ownership.  But here is the dilemma – you can only select one. So, which one? Brad Beer from BMT Tax Depreciation helps with that by giving us the facts.
Transcript:
Kevin:   Property investors often don’t know that there are two different methods of calculating the depreciation deductions for the plant and equipment items that are inside their investment property. Yet, investors can only select one. So, which one? Brad Beer from BMT Tax Depreciation joins us. Brad, welcome to the show.
Kevin:   What are the two different methods?
Brad Beer:   Yeah, thanks, Kevin, great to be here.
Brad Beer:   Two different methods of calculating the claims on plant equipment. One’s called the prime cost method. The other, the diminishing value method. Tax office comes up with fancy names here.
Brad Beer:   Prime cost is basically a straight line method, or, we take the value of the item, we take it over the effective life and we make that claim. It’s the same amount each year for the effective life of the item. A very simple way to say that is, let’s say, carpet worth $10,000 has a 10-year life. You get $1,000 per year for the 10 years of owning that carpet as a deduction.
Brad Beer:   Diminishing value, slightly different. What it is is a claim based on its diminishing value each year. Now, under the current legislation, it’s been a little different in the past, it’s twice the rate. So, it’s 20 percent instead of 10 percent. So, on your $10,000 carpet, you’ll get $200 (correction from audio – $2,000)  in the first year, which is 20 percent of the $10,000 carpet, and in the second year, you’ll get 20 percent of the value that’s left, which is 20 percent of $8,000, and so on each year diminishes based on what’s actually left each year. So you get more out of that diminishing value in the early years, but obviously, it’s a diminishing value, or diminishing claim, each year over the period of ownership.
Kevin:   Is that why, do you think, it’s the preferred option for investors, that they’re getting more money up front?
Brad Beer:   Diminishing value gets more money in the early years, absolutely. So, you would generally choose that because, you know, as investors we’re looking for money now instead of tomorrow. Money’s worth more today than it is in three years’ time. And, look, the only time you’d go the other way is if, you know, that in two or three years that you’re going to have some increase in income and you’re going to be in a different tax bracket, so these deductions might be used in a different way. So you’d be able to look at what your expected income in the future is.
Brad Beer:   When we do a report, we give you both the prime cost/diminishing value total claims, and we calculate and work out exactly what it’s going to be each year to help you with your financial advisors to make a decision on what’s actually best for you.
Brad Beer:   But, yes, usually the diminishing value gets more in the early years, and that’s when we like our money, today, not tomorrow.
Kevin:   Absolutely. Yeah. Immediate write-off and low-value pooling. Can you explain what those methods are?
Brad Beer:   The immediate write-off is, you know, items with a value of less than $300 when you buy them, and they’re not part of a set, get an instant claim in the first year that you buy them, or when you buy the property. So, you know, there’s not a lot of things worth less than $300, but rather than claiming them over 10 years, 12 years, they’re in instant deduction straight away. So the more of those we can find, obviously, the better.
Brad Beer:   The low-value pooling, not quite as simple, but, in simple terms as best we can, if an item is worth less than $1,000, rather than claiming it at its normal, effective life rate, like that carpet over 10 years, you actually get to increase the claim percentage up to 18 and 3/4 percent in the first year without a pro rata adjustment, and then 37 and 1/2 percent in the following years after that first year.
Brad Beer:   Now, 37 and 1/2 percent is much higher than 10 percent, 20 percent, obviously, so, making sure things are done properly within a low-cost pool or low-value pool, which, you know, they either are worth less than $1,000 when you buy them, or drop to a value of less than $1,000, means that you get more deductions in these early years of owning this property, so anything that does fall into those categories, obviously, we drop them into those low-value pools to maximise those deductions for investors on the way through.
Brad Beer:   Not overly difficult, but it is something that really needs to be applied properly, and just helps you to get more deductions out of those properties in the early years of ownership when you need it.
Kevin:   What kind of investors would prefer the prime cost method?
Brad Beer:   Often, large property trusts might choose prime costs, because they actually want to spread the deductions out over the time and make them the same, rather than trying to get more now and less later. And the other one would be someone who knows, as I probably alluded to before, knows that their tax bracket might be higher in a couple of years time, and the more deductions in later years will be of much more value to them, because they’ll get to claim more of the money back as they make those deductions.
Kevin:   Which experts do you think investors should consult when they’re trying to make that decision, between the prime cost and the diminishing value method?
Brad Beer:   A Quantity Surveyors, and we do this in our reports, obviously, should be able to split up the two methods, and even under the two methods, you can actually make a few more choices, so, we actually set them up with a prime cost schedule, and a diminishing value schedule with a low-value pooling schedule sort of attached to that.
Brad Beer:   But, sometimes you may want something in between, and it can be very easily done by us, and seeing what the numbers look like. But, the accountant, and yourself, obviously, you can have a discussion about your future income potential, or your future income expectations to help make sure that any deductions we help you to find are best used in your situation for going into the future.
Kevin:   Brad, great talking to you, as always, thank you very much. Brad Beer, from BMT Tax Depreciation. Thanks for your time, Brad.
Brad Beer:   Thanks, Kevin, always a pleasure. Thank you.