Property investors benefit from scrapping
Announcement posted by BMT Tax Depreciation 15 Jan 2013
Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, demolition of any existing structure or fixture onsite that would have been eligible to claim deductions for depreciation (Division 40) or building write off allowance (Division 43).
When renovating, there are significant tax advantages that can be generated over and above normal depreciation.
Prior to demolition or renovation, many investment property owners remain unaware that the old assets within their property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are replaced or ‘scrapped’, owners may be entitled to claim them as a tax deduction.
How does an investor benefit by scrapping?
Scrapping of existing structures onsite is a very effective method of obtaining tax deductions. Additional tax credits are available for investors who demolish or dispose of existing buildings or assets that produced income. In the year the item is scrapped, the written down value (WDV) can be written off as a tax deduction. To calculate the scrapping value, a quantity surveyor will identify the items removed in the renovation process.
Case Study
Jim purchased a sixty year old, three bedroom townhouse in Paddington. In its pre-renovation condition, the house contained carpet, vinyl, blinds, an air conditioner, old stove, hot water service and light fittings. When Jim learned about the potential depreciation deductions available in old, pre-renovated properties, he decided to contact BMT Tax Depreciation to enquire about a scrapping report before he started any work on the property. BMT visited the site and conducted a full site inspection, taking note of all of the items that could be written off before they were thrown out. The following deductions were obtained:
| Item | Depreciation Obtained |
| Air-conditioning unit | $600 |
| Blinds | $600 |
| Carpet | $2,500 |
| Hot water service | $420 |
| Light shades | $300 |
| Stove | $350 |
| Vinyl | $1,500 |
| Total | $6,250 |
Jim then took the BMT report to his accountant and claimed $6,270 in depreciation deductions that year in his personal tax return. Over the following twelve months, Jim completed his renovations, including an extension at the rear of the property. He again contacted BMT Tax Depreciation to come and assess the renovated property to achieve the maximum depreciation deductions. BMT Tax Depreciation were able to complete a second report for Jim, taking into consideration all new additions (stainless steel oven, cook top and range hood, new carpet, air conditioning unit, etc) as well as calculating the construction write-off allowance now available on the extension.
Both Jim and his accountant were impressed with the total depreciation claim on the scrapped assets and renovated property of $16,000 in the first year alone!
How is scrapping calculated?
The first report prepared by BMT Tax Depreciation is undertaken prior to any renovation or refurbishment. BMT Tax Depreciation prepares a report identifying the value of all plant and equipment and qualifying capital expenditure contained within the property.
A second report is then prepared by BMT Tax Depreciation after completion of the renovation, identifying the value of all new plant and equipment and capital expenditure within the property. The assets within the building that are no longer present can be written off immediately. Scrapping is a complicated process that requires the expertise of a specialist quantity surveyor, like BMT Tax Depreciation, in conjunction with an accountant.
Why scrap items?
There are several reasons why an item may be scrapped that generally fall under the heading ‘not fit for purpose’. They include;
- Obsolescence;
- Functionally inadequate;
- Dated style;
- Original form was inappropriate or does not maximise the form and function of the property; or
- Additional value to the owner is obtained from a renovation.
A valuation of all items in a property, as well as adequate photographic records, is required in case of an audit by the Australian Taxation Office.
The concepts outlined above can provide the property investor with a very attractive tool to maximise the tax benefits available from the refurbishment of an existing building, both immediately and in continued ownership. Substantial deductions can be achieved when the correct decisions are made at purchase and during the renovation process.
BMT Tax Depreciation provide an Australia wide service on all property types and are vastly experienced in identifying deductions for investment properties prior to demolition and after they have been re-built. Call the office on 1300 728 726 for obligation free advice on your property scenario.
Article Provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation. Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.