Many pub owners effectively throw away many thousands of dollars by not making the most of tax depreciation laws on property acquisitions and renovations, says specialist Mark Wilkins.
“For most typical pubs we find there is generally around $500K in plant items across both the land and business … give or take,” says Wilkins, principal at Capital Claims.
Tax depreciation on capital works is typically applied annually at 2.5 per cent of the original construction cost or four per cent of the accommodation component. It is not standard practise for the vendor to provide the cost of past works, meaning an ATO-recognised quantity surveyor will be required.
“When a new owner takes over a pub, they also take over the rights to claim the capital allowances for the historical works – for as long as they hold that property.
“Get a quantity surveyor in to identify, capture and value the plant and equipment and capital works on the site,” suggests Wilkins.
The immediate write-off laws adopted in recent years mean that many easily identified items can be claimed in year one.
Claiming renovation depreciation on a newly acquired pub
When a pub is purchased, preparation for a renovation begins on day one. Contracts of sale are used to determine ‘agreed values’ for Plant & Equipment*, in line with inventory, and items are allocated to either the freehold or leasehold business and assigned effective lives.
Wilkins says many new owners forget to start the process early, thereby failing to set their ‘baseline’.
“There are ongoing deductions available for past works; assets included in the sale of both the freehold and leasehold.
“If any of those works or assets are removed in the renovation process, there will be immediate deductions available in that financial year.”
Claiming on new renovations
Whenever capital works are demolished, any residual value of the works are claimable immediately.
“When renovations are undertaken in a new acquisition, these items are typically scrapped and written off as a tax deduction.
“This can amount to big figures – hundreds of thousands of dollars – in years one or two.”
Renovation costs are broken down and allocated effective lives based upon taxation legislation, with maximised values allocated for accelerated depreciation claims, which can provide a “kickstart” for cashflow.
According to Capital Claims there are always hidden capital works in plumbing, electrical and previous renovations and additions, often leading to thousands of dollars thrown into the skip bin.
“Once the works start and the demolition crew kicks, time is running out,” bodes Wilkins. “Most of the focus is heaped on the renovation and design outcomes, not what is being removed.”
After the works are complete there is both immediate and ongoing depreciation available, which, for optimal returns, are best managed by a quantity surveyor. If the process has not been initiated immediately, back claims can be made.
Tax deductions reduce an entity’s taxable income, meaning they pay less or get a tax return. The 25 per cent business tax rate means a $500K deduction produces $125K in actual cash saving or refund.
When taking on a client, Capital Claims investigates, inspecting the sale contracts and asking questions.
This can lead to uncovering unconsidered ‘drip-fed claims’ stemming from the writing down (at 2.5 per cent annually) of the historical value of works, which Wilkins tips can amount to “anywhere from $100K to millions of dollars”.
*Plant and Equipment
Examples include: furniture, security systems and CCTV, AV and entertainment assets, hot water system, kitchen equipment, lighting, heaters and air-conditioning, fire detection, computers and telephone systems.
Capital works are defined as improvements, not repairs or maintenance. Examples include structural works, carpark, roof, internal walls and bathrooms, bars, and electrical and plumbing.
