Capital Claims Tax Depreciation are Hotel Depreciation Specialists

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With state and federal governments continually putting their hand out for your cash, it seems like every month there is a BAS to pay, a payroll tax obligation to meet, or company tax payable.  

Add to that the constant market demand for aesthetic improvements and large expenses for pubs seem constant.  

Now more than every it has become critical to find areas where you can claw back some of this valuable cash for your business.  

Often overlooked are the intricacies of boosting cash flow through accurate and effective reporting of your Plant and Equipment assets and subsequent depreciation.

A new purchaser has the opportunity to maximise this potential right from the beginning.  No matter which state you are purchasing your pub in, our research shows that purchasers will benefit from leaving the "Goodwill" and "Plant and Equipment" values in the contract of sale silent, to be re-valued and asses

Why is it better to maximise the Plant and Equipment values over Goodwill?

In states (QLD, VIC, NT, WA) where both Goodwill and Plant and Equipment are dutiable business assets, or in SA where neither are dutiable, the apportionment of value between the assets makes no difference when it comes to calculating Stamp Duty.

However, by maximising Plant and Equipment publicans can maximise the depreciation deductions claimable, especially in the first couple of years, providing for a substantial boost to business cash flow. This benefit has become even greater now that businesses trading up to $50 million in revenue per annum can utilise immediate write-off provisions for individual assets valued up to $30,000.

What about in States where there is no Stamp Duty on Goodwill and other Business Assets?

In NSW, ACT and TAS where Stamp Duty is not payable on Goodwill or other Business Assets, we have seen a tendency for purchasers and their accountants to inflate the Goodwill component at the expense of Plant and Equipment assets in order to minimise Stamp Duty. We have seen a significant rise in this practice in NSW since the abolition of Duties on Business Assets and Licences came into effect on 1st July, 2016.

When we look at the numbers however, the rate of Stamp Duty payable is significantly less than the business tax rate and therefore the value of depreciation deductions claimable on Plant and Equipment Assets. 

Why is it best to leave the contract values blank?

When the contract of sale stipulates the specific value of Plant and Equipment, that becomes the maximum value attributable to the Plant and Equipment items listed in the inventory. Where the contract value remains blank, this limitation no longer exists.

As an example, if my contract of sale stipulated a Plant and Equipment value of $100,000 for the attached inventory of assets, then that $100,000 maximum has to be dissected and applied against the individual assets listed inventory, to a maximum of $100,000 only.  But what if the actual sum value of those assets is higher?  If a Quantity Surveyor were engaged to independently assess and value all of the assets of the business, and their results reported a total asset value of $150,000, that is $50,000 worth of assets that wouldn't be claimable for depreciation due to the limit imposed by the stipulated contract value.

Why wouldn't I use Plant and Equipment values available from the vendor?

Remember that the vendor has already been depreciating the Plant and Equipment items themselves (sometimes as aggressively as possible if they have a good Quantity Surveyor) during the time they have owned them. By obtaining and including values from the vendor, you are bound to use them, and can only depreciate from that remaining residual value.

It would be much wiser to have your own independent depreciation schedule prepared by a Quantity Surveyor to assess and determine the Plant and Equipment values. Quantity Surveyors are qualified to revalue assets and assign new effective lives each time an asset changes hands. Not only may this result in higher asset values from which to depreciate, but you will have a detailed schedule outlining the depreciation claimable each year for the effective life of each asset.

Further to that, we have seen many examples where the inventory list provided was incomplete.  Missing assets have included carpet, window furnishings, light shades, bathroom accessories, furniture etc.  In these cases, a thorough inspection by a Quantity Surveyor has resulted in tens of thousands to hundreds of thousands of dollars of additional assets identified, re-valued and forecasted for depreciation.  This represents a significant boost in cash flow to the business each year.

Example demonstrating the different valuations can make to stamp duty and depreciation calculations in NSW, ACT and TAS:

 pub depreciation plant and equipment (1).png

*All Plant and Equipment items are individually valued at less than $20,000 excl. GST.
^Depreciation deductions are applied against 27.5% Small Business Tax Rate.

The benefits of maximum Plant and Equipment values are even greater if you are planning a renovation or refurbishment

Pubs are often purchased with the view to update and improve decor and furnishings, and will sometimes even undergo a complete overhaul. Maximising your Plant and Equipment values at purchase provides for maximum scrapping/disposal value when those same assets are removed from the business. This has the potential to greatly improve the cash flow and the overall return on investment of the works undertaken.

Importantly, ensure you have a Quantity Surveyor prepare a pre-works and post-works schedule to ensure maximum reporting of the scrapped assets, and a comprehensive schedule for the new works.

Here is what we recommend to assist in creating the best cash flow start to your new pub

Ensure you have a Quantity Surveyor, who is a specialist in hotels and accommodation inspect the property to assess and value all of the included assets.  You may even be able to negotiate for the vendor to share the cost if they were arranging for an inventory inspection and report to include in the contract of sale anyway.  This process saves costs overall between the parties as only a single inspection will be required.  A complete inventory can be prepared and delivered for the vendor, and that same inventory can be used to create the ongoing depreciation schedule for you as the purchaser post-purchase.  

Many times we have been asked to prepare a depreciation schedule for a hotel using a combination of an inventory and Plant and Equipment valuation prepared and delivered by the vendor, plus our own inspection of assets as ordered by the purchaser.  It is more work, and therefore more costly to dissect and attribute given and limited costs, and to then reconcile against our own inspection to report the remainder.  But more importantly, for the new owner this method typically results in much lower asset values and far less deductions claimable for depreciation.  This issue is can be easily avoided by having a specialist Quantity Surveyor engaged earlier in the process.

Case Study - Prince of Wales Hotel, Merewether

The Prince of Wales Hotel is a popular, iconic hotel in Merewether, Newcastle.  Situated outside of the CBD the pub has long been a popular watering hole for locals in the Junction, Merewether and Bar Beach areas.  A 1400sqm establishment, the hotel is spread across 2 levels and features a main bar, bistro area, and poker machine room, bottleshop with coolrooms and driveway on it's ground floor, with an upstairs function room, main residence, office and verandah.

In February 2017 the pub was purchased freehold and leasehold by experienced local publicans Ian and Ty Burford.  Specialist hotel valuers Robertson and Robertson were engaged to perform a valuation of the hotel and consulted with us regarding valuation of the included Plant and Equipment assets as part of that valuation.

As with many hotel purchases the purchasing party were hoping for a greater portion of the valuation to be attributed to Goodwill and Poker Machine Entitlements (at the expense of Plant and Equipment Assets) in order to make a savings in the Stamp Duty Payable at purchase.

Through our discussions with Ty and Ian we learned that substantial renovations were also planned for the establishment, as the fit-out and decor had become run down and were no longer aesthetically appealing for their target market.

Having worked with many publicans, hotel valuers and their accountants over the years, this was a story we were very familiar with.  What we have also seen is many cases where publicans have lost out in cash flow and overall cash savings right from the beginning by valuing Plant and Equipment too low, or working off the Plant and Equipment values presented by outgoing owners.

We discussed this extensively with Ty and Ian and once the numbers were presented they could see the value in more accurately valuing Plant and Equipment Assets to provide for greater deductions in asset write-offs, depreciation and eventually scrapping, as opposed to making a Stamp Duty saving up-front.  This was especially the case for this hotel for these key reasons:

  1. the holding entity fell within the revenue threshold to be able to immediately write-off assets valued up to $20,000, representing a fantastic up-front deduction that already outweighed the Stamp Duty savings in that year alone;
  2. the owners were planning substantial renovations for the establishment meaning higher scrapping values for remaining assets that are later removed and demolished.  This provides for great additional cash flow in the year these assets are scrapped;
  3. depreciation deductions for any remaining assets were being maximised going forward.

By leaving the values for the Goodwill and Plant and Equipment Assets silent in the contract, the Burfords were able to have their Plant and Equipment Assets accurately re-valued without any pre-imposed stipulated contract value limiting the ability to value them to their full potential.

Two separate schedules were prepared for this hotel, for both Freehold and Leasehold.  Results for each were as follows:

 Prince of Wales figures .jpg

Total depreciation for the full 40 years is $892,807 for the freehold and $762,804 for the leasehold.

Some depreciation will be brought forward and claimed in an immediate write-off when assets are disposed of or demolished for the renovations.

Bar snack version

  • Unless advised otherwise by your accountant (for a reason specific to your circumstances) maximise the Plant and Equipment values of your new pub;
  • The extra depreciation (and possibly scrapping) deductions available will far outweigh any possible savings of Stamp Duty payable;
  • Do not obtain Plant and Equipment values from the vendor - you will maximise the Plant and Equipment values by having a Quantity Surveyor value them;
  • Leave the Goodwill and Plant and Equipment values on the contract silent to avoid limiting your asset valuations and subsequent depreciation claimable;
  • Engage a Quantity Surveyor as early as you can to ensure you are maximising your asset values and depreciation claimable for your own circumstances;
  • Use only a Quantity Surveyor who specialises in hotels/hospitality - commercial depreciation is different to residential and requires specialist experience and expertise.

Mark Wilkins and the team at Capital Claims Tax Depreciation are capital allowance and depreciation specialists for the hotel and hospitality industry.  With over 15 years experience working with hoteliers and their accountants, the team has been engaged to assess and report upon hotels all over Australia, from small individual run regional pubs, to substantial CBD establishments.  Mark and his team are always available for complimentary consultation and advice so if you have any queries give them a call today!  1300 922 220 or email Mark here.

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