In today’s show Brad Beer, from BMT Tax Depreciation, answers your question about property depreciation and capital gains tax.
Kevin: As a follow-on from an interview that I did with Brad Beer from BMT Tax Depreciation a couple of weeks ago, David wrote to us and said, “In a segment on tax deduction for depreciation, it was said that why would you let the tax office have that money? Doesn’t the tax office get all those amounts that you’ve claimed over the years when the property is sold by you or your estate?
“Sure, inflation will have diminished the effect, but they still get it all back. Or do they take the view that even if you didn’t claim depreciation it still happened, and would take it off the cost base and hence increase the capital gain on which you pay tax?”
David, thank you for your question. I have Brad on the line.
Good day, Brad.
Brad: Hi, Kevin.
Kevin: Brad, I’ve sent that through to you. What’s your response there to David?
Brad: It’s a question around the capital gains tax and the impact of claiming depreciation and capital allowances on the capital gains tax position or the cost base.
Now, the cost base will be reduced by some of the claims that you make. Yes, inflation causes a diminished effect. But the other big difference is that when you make those deductions on the way through while you own this property, you make those deductions against your other income at your full marginal tax rate.
When and if you potentially pay capital gains tax at the time you may sell a property – providing you own it more than 12 months, etc. – you pay capital gains tax at half of your marginal tax rate.
When you actually calculate the numbers, because of the fact that the deduction and the amount you put in your pocket on the way through is more than what you would lose in capital gains tax at the end, it’s still usually worth claiming them. It’s more than just the diminished effect of inflation; it’s also the fact that there’s a different amount.
We’ve run some case studies in the past, and I’d be happy to provide those to you, Kevin, or any of your readers on some numbers on this on what difference it actually makes in a couple of different scenarios.
The accountant will be able to look at yours in particular – because we’re not the accountants, remember; we’re the quantity surveyors who work out the depreciation. But generally, you end up with more money in your pocket than what you end up paying in capital gains tax or additional capital gains tax at the end, should you sell the property.
I’m also a believer in the fact that if you have the money, you can use it, and you can use it to help minimize the interest you pay on debt and things like that. You just have to recognize that at the end you may need to have that money if you do have a bit of a capital gains tax bill. That’s all.
Kevin: Now, those case studies you mentioned there, Brad, are they available on your website, or would people need to talk to you directly to get those?
Brad: It’s in one of the previous editions of the Maverick newsletter, so it would be available on the website. Or just drop us a quick e-mail, and I’ll direct you in exactly the right position.
Kevin: Okay. David or anyone else listening, if you’d like those case studies, you can get in direct contact with Brad, or let me know through the website and we’ll put you in touch.
Brad, thanks so much for your time, mate. I appreciate – as I’m sure David does – you answering that question. Thanks, mate.
Brad: Thanks, Kevin.