We have recently seen some confusion in the investor community when it comes to how the "scrapping" or disposal of assets is accounted for in rental properties, since the legislation change in May 2017.
To keep it simple, the only change really relates to residential properties held by individuals and purchased second-hand after May 2017. And for these properties, all capital works (building works) are still eligible for claims, but the second hand assets are not. See the table below to work out if scrapping is claimable for your property.
The legislation around claiming immediate write-off for the disposal of assets remains unchanged for:
Asset scrapping just refers to the writing off of building works that have been demolished, or assets that have been removed/replaced in an income-producing property.
All typical income-producing properties have a constructed/build component (the building or capital works), and an assets component (plant and equipment). These works and assets all have a value that is written down over time as they age and wear out.
When capital works and assets are demolished or disposed of, any residual value remaining in their effective life can be claimed in total as a tax deduction in the year of the demolition/disposal.
Capital works example - a garage that cost $20,000 to build 25 years ago has a construction life of 40 years. If an investor tears down that 25 year old garage, then the 15 years of deductions that remain unclaimed can all be claimed in total in that financial year. So the investor will claim a tax deduction for $7,500 that year.
Plant and equipment example - carpet laid in a residential property cost $12,000 to lay 4 years ago and has an effective life of 10 years. The carpet is being replaced between tenancies. The investor owners have deductions for the depreciation of their carpet over the last 4 years using the diminishing value method. The residual value of the carpet when disposed of is still almost $4,000 (depending on the exact number of days it was installed). This means the owners can claim a tax deduction for that amount in that financial year.
When doing major renovations that include the complete remodelling of bathrooms and kitchens, replacement of carpet, blinds, curtains, light shades etc, the deductible amounts of capital works and assets can really add up. We have prepared schedules for investors that have claimed tens of thousands of dollars in scrapping in a single year.
For commercial property owners of large buildings and expensive assets, these deductions can be very substantial. We have prepared reports for hoteliers that have claimed over $100,000 in scrapping after their hotel refurbishments.
To make claims for scrapping you need to know the value of the assets that are demolished and disposed of, at the time they are discarded.
A depreciation and scrapping schedule prepared by a quantity surveyor is the best way to ensure that you are maximising your tax deductions for scrapping and new building works and assets, whilst remaining ATO compliant.
For professional advice about claiming for scrapping of building works and assets, we recommend you speak with our team at Capital Claims Tax Depreciation on 1300 922 220.