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Tax depreciation schedule inspections – are they optional?

Tax accountants
4 min read
Tax depreciation inspections are required for every property, other than under specific circumstances. Photo: Shutterstock

Tax depreciation schedule inspections – are they optional?

Sadly, it seems that the COVID-19 pandemic has seen some depreciation firms look to adjust their standard practices around inspecting an investment property in perpetuity.

Sadly, it seems that the COVID-19 pandemic has seen some depreciation firms look to adjust their standard practices around inspecting an investment property in perpetuity.

I warned investors years ago to avoid the firms offering an inspection as an option or as part of some sort of gold package. However, it appears it is time to take another look at this issue. 

What always gets me jazzed up is when people talk about being ATO approved (which is never an actual thing) or claiming their take on this is accepted by the Australian Institute of Quantity Surveyors (AIQS).

What’s my beef with this? Well companies are starting to talk about how much data they have, how many reports they have done and what they’re proposing sounds like data benchmarking. 

Do not get me wrong, I love data and I like to think I’ve been innovating ways to utilise and present it in this space for a few years. Not to complete reports though. 

So, under what circumstances is an inspection not required?

1. The Quantity Surveyor has already completed a schedule on a property within the same development

This one you will see quite a lot, and it can certainly be a valid reason why an additional inspection is not required. Especially since the common areas would have been inspected already. 

However;

  • What if the original inspection was on a different type of apartment. Say a two-bedroom unit as opposed to a penthouse. Or the complex is so big, that certain apartments have access to storage areas that other unit owners physically can’t access?
  • What if the property inspected the first time was unrenovated, but the new one has had improvements? Sure, the new owner will let the quantity surveyor know, but what if the owner themselves did not know that the prior owner changed something? This certainly happens.
  • Are all different unit types completed to the same standard? Units on the top floor, might have different high-quality marble bathrooms whereas the bottom floor units are basic. In this instance, a previous inspection on a lesser standard of unit cannot be used as the basis for a report on the units with premium fixtures and fittings. 
  • Is the property furnished? If the property is furnished, the previous inspection needs to have been completed on a unit that was also furnished. Unless it is categorically known that the furniture package is identical.

As you can see, the analysis as to whether it is appropriate to forego an inspection is detailed and not easily represented by a sentence or paragraph about how many reports a company has done. I also didn’t mention the time difference between the new report and the last inspection of the development. Was it last month, or last year? The longer the time period, the more chance there is that something has changed either within the unit itself, or the common areas.

2. The property has been built brand new for the investor, and they’ve been provided detailed plans and specifications

These are probably the other most common reasons for a report to be prepared without an inspection. I’ve certainly done many reports on this basis. Sometimes happily, as the detail provided was fantastic. Other times, I’ve advised the client there are unknowns which I’ll elaborate on. 

I've seen plans where the floor coverings are not completely specified. Say for example, the statement ‘carpet to bedrooms. It’s impossible to tell whether the living areas are carpet or tile.

This may not sound important, but with tiles depreciating at 2.5 per cent of their opening value each year compared to carpet at 25 per cent, we’re talking a 10x difference in first year claims. In a similar vein, specifications also say things like “stainless steel appliances”. Are we talking about Miele or Technika?

Often when we are given the brand, the model number is a mystery. Worse than these examples are when the plans and specifications don’t show the item at all! Garage door motors and water tanks are a great example of ghost plan items that we regularly see on site.

One less common example is when a QS firm undertakes work throughout the construction phase, such as working for the financer. 

They will have photographic evidence and notes throughout the whole process. Even then, the AIQS states there are risks with this approach due to potential additions etc.

The AIQS certainly advised members that during COVID-19 that firms could prepare a preliminary report, but would need to inspect the property once access was available. Their guidance notes also state that;

”A site inspection is considered to be a necessary requirement to satisfy the evidentiary requirements of TR 97/25.”

If you’re an investor and you’ve purchased an older property, I strongly suggest never having a depreciation company complete a depreciation schedule without an inspection. 

We all like to save money where we can, but the risks involved in these approaches run across compliance with regulatory bodies and the tax office itself, and actual tax deductions in your back pocket. Be wary of any claims that an inspection isn’t required, and ask for detailed reasons as to why. Failing that, just have one completed as part of your tax deductible depreciation schedule and live safe in the knowledge that your deductions are maximised and your report is compliant.

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