If you are about to throw out those old kitchen fittings in readiness for a bright and shiny renovation, wait up a minute. Did you know that you could claim a tax deduction on some of the items you are about to ‘scrap’?
‘Scrapping’ is the removal and disposal of any potentially depreciable assets from an investment property scenario. In other words, the demolition of any existing structure or fixture onsite that would have been eligible for claiming deductions for depreciation or building write-off allowance.
According to quantity surveyors BMT and Associates, many investment property owners are unaware that the old assets within their property, as well as the building itself, can be worth thousands of dollars.
BMT Director Bradley Beer says there are significant tax advantages that can be generated over and above normal depreciation by recording the value of old assets (like carpet and hot water systems) prior to demolition or renovation.
“When these are replaced or ‘scrapped’, owners might be entitled to claim them as a tax deduction”, Beer says.
How does an investor benefit by scrapping?
Scrapping of existing structures onsite is a very effective method of obtaining deductions within our tax system. It can provide additional tax credits for investors who demolish or dispose of existing buildings or any part of it which was owned as an investment asset and eligible to produce income.
Essentially if an item is scrapped, the written down value (WDV) of the item can be ‘written off’ as a tax deduction in the year the expense is incurred. To calculate the scrapping value, a quantity surveyor or client’s accountant identifies the items that were removed or scrapped in the renovation process.
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.
To maximise a scrapping claim, focus should be given to items classified under Division 40 (‘plant & equipment’) as these items have the highest depreciation claim and often the greatest individual value.
It is important to note that a valuation of all items, including those to be retained and those to be scrapped in the refurbishment process, is required.
It is also important to keep adequate photographic records for possible future auditing by the Australian Taxation Office.
Substantial deductions can be achieved when the correct decisions are made at purchase and during the renovation or redevelopment process.
