Scrapping assets in your investment property

What many investors may not have considered when they are renovating their investment property is the value of the items they are throwing or giving away.

You may be thinking that the old bath tub, or kitchen cupboards, or carpet and blinds are so old that there is no value left in them, but as assets are assigned new values each time they change hands you will be surprised. Any effective life determined to be still existing within the assets has a value, and the value becomes an immediate write-off when the item is scrapped. That’s right…that old carpet, tired curtains, dated kitchen cupboards and sink that just got hauled away in the skip, could have a combined value of a few thousand dollars that can be claimed as a deduction (Disposal of Assets or Scrapping) straight up in the first financial year. The key to utilising this nifty strategy is to ensure that your quantity surveyor can value those items. This can be done via a pre-renovation inspection, or via photos and notes taken of the assets prior to removal. It is common for investors to claim up to $5,000 for "scrapping" for a reasonable renovation.  That means a $5,000 immediate deduction that financial year.  Some clients have even claimed up to $100,000! Combined with the claims of your new assets, the scrapping of old assets makes a great contribution to keeping your tax down at the end of financial year.

And...we don't charge extra to include scrapping to our Tax Depreciation Schedules. Most of our competitors do, so if you have renovated, or plan on renovating, be sure you don't end up paying extra when it comes time to order your Tax Depreciation Schedule.

Case Study - Residential House

Quite often when discussing renovation with investors they are surprised to hear that they can have an immediate deduction for the capital works and depreciable assets that will be removed and scrapped in the process of the renovation. This case study shows a 25-year-old investment property (built in 1991) that was purchased early 2016.  The kitchen and bathroom underwent a full renovation.

Purchased:  February 2016

Renovations completed:  April 2016

Rented from:  May 2016

Deductions for scrapping in the 2016 financial year:  $20,000

Total deductions from depreciation schedule for the 2016 financial year:  $27,654

Summary breakdown of treatment of assets (figures are rounded for ease of reading):

Residential tax depreciation scrapping table

As you can see in the scenario above there has been some considerable benefit made in claims for the 2016 year. In fact, in excess of 40% of the value of the refurbishment has been deductible in the first year due to claiming the residual value of the scrapped works and assets. Those scrapped assets and works are the same ones that have been in the property for the last 25 years, and finally have been retired to the skip bin, even though on paper they still had value attached to them.

Case Study - Commercial Property (Hotel)

Late in 2015 a country hotel was purchased by a new owner operator lock stock and barrel; or should we say the building, the business and the beer.

The new owners saw the potential in the pub beyond what was currently there; the previous hotelier had spent some considerable money on fitting out the place but had had not pitched it for his market. So when the new owners took hold of the hotel they went to work on redesigning and redeveloping the offering. In order to do this, they had to rip out all of the work of the previous hotelier, and start again. However, they left the Bottle Shop untouched.  Because the previous fit out work had been done relatively recently there was large value yet to be claimed…. A win for the new owner of the hotel.

Deductions for scrapping in the 2016 financial year:  $230,000

Total deductions from depreciation schedule for the 2016 financial year:  $417,625

Summary breakdown of treatment of assets (figures are rounded for ease of reading):

Commercial depreciation scrapping table

Based upon the rounded numbers above for this particular project, the new owner of the hotel was entitled to massive amounts of depreciation in the first year of owning this property. Firstly, they were able to write off the majority of the Assets of the purchase under the Small Business immediate write off rules, secondly they scrapped and disposed of all of the previous Capital Improvements, and thirdly they were able to write off all of the new assets within the renovation as they also were individually less than $20,000 per asset.

If you own an investment property, the best way to ensure your depreciation deductions have been maximised is to use a depreciation schedule prepared by Capital Claims Tax Depreciation. For an estimate of deductions you may be entitled to, or to have your current depreciation schedule reviewed free of charge, please don't hesitate to get in touch.