We have recently seen some confusion in the professional and property investor community when it comes to how the “scrapping” or disposal of assets is accounted for in residential and commercial investment properties. Since the legislation change back in May 2017, there have been changes on how “scrapping” can be claimed.
To keep it simple, the key change relates to residential investment properties held by individuals that were purchased second-hand after May 2017. And for these properties, all capital works (building works) known as Division 43 are still eligible for annual claims, but the second-hand assets known as Division 40 – plant and equipment ie carpet, blinds, ceiling fans, assets are not.
The legislation around claiming immediate write-off for the disposal of assets remains unchanged for:
- Commercial properties;
- Residential properties purchased brand new;
- Residential properties (new or old) purchased in a commercial entity;
- Residential properties purchased before May 2017.
See the table below to work out if scrapping is claimable for your investment property:
What do we mean by scrapping?
Asset scrapping refers to the writing off of building works, Division 43, that have been demolished, or plant and equipment assets, Division 40, 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). Both the structure and the assets 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, Division 43 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 Assets – Division 40 Example
Carpet in a residential property that cost $12,000 to lay 4 years ago had 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.
How to make claims for the scrapping
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. In most scenarios, you will need to have an inspection completed by a qualified quantity surveyor before and after.
How much is a scrapping report?
Here at Capital Claims Tax Depreciation our scrapping report is included in our fee with your tax depreciation schedule. There is no extra-cost! It is a one-off fee that is 100% tax deductible. Get in touch by visiting our “Quote For Depreciation Schedule.” You will receive a personalised quote for your investment property scenario.
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 Division 43 and plant and equipment assets Division 40, we recommend you speak with our team at Capital Claims Tax Depreciation on 1300 922 220. Or you can send an email to info@capitalclaims.com.au.
