Started up Property company for a buy-to-let setup

[devilliersheymans]

Hi,

I have started a Pty for a buy-to-let setup as I understand this is the best way to avoid heavy taxes on Rental income in a personal capacity.
I need help with a few accounting principles and searched on the threads but was not able to find anything, so I hope starting a new thread is in order?

So the company is registered and we are 2 directors sharing equity in the business as per our Capital inputs.

We are in the process of buying the first property and have just paid the Legal fees for the transfer of a property(Under 750K so no Transfer Duty)

My questions is do you capitalize this amount as part of the asset or is this an expense that needs to be allocated under other expenses(Legal Fees)?
additionally do you do the same with the Bond Registration cost?

Looking forward to the responses!

[CLIVE-TRIANGLE]

You can capitalize the transfer costs.
Personally I regard the bond registration costs as a financing cost, but some do capitalize it.

[devilliersheymans]

Thanx.

Most answers back have been to capitalize all costs involved with acquiring the asset.

Next question would be, if there is a choice between the 2 would it not be better to expense the costs immediately as it will keep the profit of the company in the (RED) for a longer period in the short run and therefore eliminating the tax liability? Where income could surpass expenses if the asset is depreciated over 20 years due to the high increase of rental income? (20 years is correct for the depreciation of PPE?)

Thanx again for the help Clive

[CLIVE-TRIANGLE]

If the expense is capital in nature, such as acquisition costs, then you should not expense it. It is wrong both in accounting and in taxation, and may well bite you in the posterior in subsequent years.

Bond registration costs are not acquisition costs; they are costs you incurred to obtain finance to pay for the acquisition. It is a borrowing cost and in terms of IFRS borrowing costs are accounted for as incurred. I know that some folk capitalize it, but that's wrong.

There are circumstances when capitalization of borrowing costs is appropriate; if it is a building loan, for example, then borrowing costs are capitalized, but only during the period of construction, and only to the extent that they can be directly attributed. If construction is suspended for whatever reason, then so too are the borrowing costs (and they are then charged to income instead, during the suspension). Once the asset produces income, borrowing costs are expensed.

Regarding depreciation. IFRS position.
Fixed property held to rent is classed as investment property. IFRS requires that it initially be recognized at cost, but then be stated at valuation by a sworn valuator. Any increase or decrease in the value is to be recognized in the income statement as a fair value adjustment.
If there is no valuation done, then IFRS requires that you classify (re-classify if necessary) it as property, plant and equipment and that you depreciate it accordingly.

Tax position.
The fair value adjustments are reversed.
Depreciation, if any, is added back.
Any allowances that may apply depends on the nature and use of the building.

[devilliersheymans]

Thank you very much. This settles it for now.

Really appreciate the assistance and will certainly be posting more.

[devilliersheymans]

A lot of the companies start up capital is obtained from Loans from Members. What would be the max acceptable interest rate that a member could claim against the company for the loan?