15 Jan Is this a way to reduce capital gains tax? – Brad Beer
Brad Beer answers a complex question from Grant Campbell about property depreciation and capital gain.
Kevin: I have a question now from Grant Campbell. Thank you very much for your question, Grant. It’s directed at Brad Beer from BMT Tax Depreciation. He joins me on the line. Good day, Brad.
Brad: Hi, Kevin. Great to be here.
Kevin: Now, this question from Grant, I know you’re going to have to give me a fairly general answer to this, but he does go into a bit of detail here. It’s about depreciation and capital gains tax. If depreciation is added back to the cost base, this should reduce the capital gain and therefore the capital gains tax on sale. For example, if I claim $5000 depreciation for five years, that’s $25,000, and the property shows a $50,000 capital gain, then the gross capital gain is $25,000. As it’s been owned for five years there is a 50% reduction, that is $12,500 would be added to my income for the year when the property was sold. Is this correct? Now, I understand, Brad, you might have to give a generalized answer to this, but can you cover that for us?
Brad: Yes, Kevin, definitely. It’s a regular question that we do get about the capital gain being added, creating additional capital gains tax at the end. The simple fact is that yes, it does, and it means that the capital gains tax liability based on some of the claims will be higher. Now, the building allowance component and the plant and equipment component are actually traded slightly differently, firstly. Without going into the complete detail on that, even aside from that, looking at the fact that what we get to do with deductions on the way through while we own this property is claim these deductions at our full marginal tax rate. When we sell a property and we pay a capital gains tax after 12 months, then we actually pay capital gains tax at half of our marginal tax rate. And when you actually calculate this out in individual scenarios, most of the time – and there are a few dependencies, your tax rate and things here – what happens is that you actually get a deduction of more money than what you have to pay out in additional capital gains tax at the end because you make deduction on the full marginal tax rate, you pay capital gains tax at half the marginal tax rate. And you also have then the benefit of the cash while you do it. You can put that into an offset account and pay less interest on your property, for example, or use it for something else. And you have the benefit of the time value of money. Money today is worth more than money in five years’ time because of inflation. So if you can get the money in your hand today, even if it means you’re going to have a tax liability that may be higher in the future, the fact is under this type of scenario, it’s less than what you put in your pocket at that time usually and you actually get to use the money. We’ve actually run and done some case studies on different scenarios – and they’ll be available on the website or in Maverick or we’ll find them if you want them – so that you can actually see exactly what happened in different scenarios. We’ve done those and they’re a good way to learn, and you can read in some much more detail about exactly why, how, and what it actually means to that investor. A good gauge, Kevin, is sometimes someone comes to us after those they’ve sold a property and what we’ll do then is say, “Well, you have the capital gains tax thing to think about, we think your deductions will be roughly this. If you get the accountant to crunch the numbers of what it means for you in cash, then is it still worth doing the depreciation schedule?” And usually we’ve pretty much always still do it because they get more money than what they lose in capital gains tax anyway.
Kevin: You mentioned Maverick there. Now, that’s your newsletter. How can someone get onto that mailing list so that we can make sure we get that, Brad?
Brad: The Maverick newsletter, we write it a couple of times a year. We write case studies on lots of things. At our website, bmtqs.com.au, join Maverick – very easy – or send us an email and we’ll join you to that. The back issues are available or send me an email and we can actually send you the capital gains tax one specifically if you’d like to read that.
Kevin: If you want to go to the website, there’s always the link on Real Estate Talk. Just go and click on that there, or the website is bmtqs.com.au. Brad, thank you very much. I know that’s a complex situation, but you handled that very well there for Grant. And Grant, thank you very much for sending that in. Brad, thanks again for your time.
Brad: Excellent. Thanks very much, Kevin.