Scrapping: Are you entitled to thousands pre-renovation?

Scrapping is the removal and disposal of any potentially depreciable assets from an investment property scenario. 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).

With the age of some properties now requiring renovation or redevelopment 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, as well as the building itself, 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. Before you discard old items or demolish your investment property, check to make sure you aren’t throwing dollars away!

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, the quantity surveyor or client’s accountant identifies the items that were removed or scrapped in the renovation process.

Case Study

Jim purchased a 60 year old 3 bedroom townhouse. In its pre-renovation condition, the house contained carpet, vinyl, blinds, an air conditioner, old stove, hot water service and light fittings. Upon his accountant telling him about the potential depreciation deductions available in old, pre-renovated properties, Jim decided to contact BMT 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 the items that could be ‘written off’ before they were thrown out. The following deductions were obtained:

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 12 months, Jim completed his renovations, including an extension at the rear of the property. He again contacted BMT to reassess the renovated property to achieve the maximum depreciation deductions.

BMT were able to complete a second report for Jim, taking into consideration all new additions (stainless steel oven, cooktop and rangehood, 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!

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. 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 or redevelopment process.

BMT 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.

Financiers – Tell Your Clients!

If any of your clients come to you requiring finance for their investment property and plan to knock down and rebuild, tell them about the scrapping potential in their property. It may save them thousands of dollars – they'll appreciate you passing on the information!

Want to estimate how much your next development will cost?

For our accurate construction cost calculator, visit http://www.bmtqs.com.au/construction_cost_calculator.htm

For our construction cost table, visit http://www.bmtqs.com.au/construction_cost_table.htm

Alternatively, phone the office for further information.