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Cosmetic or substantial renovation? Tax implications

BMT team — Tue, 29 Oct 2019 22:09:51 +0000

Australian property investors are increasingly undertaking both substantial and cosmetic renovations to increase property values. Renovations were up 11 per cent this year according to Master Builders Australia, with chief economist Shane Garrett stating, “Australia’s home renovations sector enjoyed its busiest quarter in 14 years during the three months to September 2018”. Let’s look at the difference between a substantial renovation and a cosmetic renovation and the tax implications for owners of investment properties. In this article we will answer: What is a substantial renovation? What is a cosmetic renovation? What are the rules affecting second-hand property owners? What is a substantial renovation? According to the Australian Taxation Office (ATO), substantial renovations occur where ‘all, or substantially all, of a building is removed or is replaced’. This includes removing or replacing ‘foundations, external walls, interior supporting walls, floors, roof or staircases’. When combined, these would directly affect most rooms within a property. If you’re undertaking any structural work that requires building approval, or moving doors and walls, the renovations would likely be categorised as structural in nature. If a property was substantially renovated by previous owners prior to selling and renovations remained unused, property investors can claim depreciation on the new plant and equipment assets installed by the previous owner, as well as any newly installed or qualifying capital works deductions available. With substantial renovations, the following applies: Investors who do not live in the property during renovations can claim on work they complete themselves Investors can claim on capital works renovations Investors can claim on existing plant and equipment installed by the previous owner Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing What is a cosmetic renovation? Cosmetic renovations are generally visual in nature and more cost effective than their structural counterparts. Examples of cosmetic renovations can include painting, patching up minor wall cracks, adding new carpet, replacing hardware like door handles, adding a letterbox to the front of a house or changing light fittings. Undertaking a cosmetic renovation is a good way to improve a property without incurring the expense of undertaking a substantial renovation, but it’s important to understand the differences and know what you can claim. With cosmetic renovations, the following applies: Investors who do not live in the property during renovations can claim on work they complete themselves Investors can claim on capital works renovations Investors can’t claim on existing plant and equipment installed by the previous owner Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing What are the rules affecting second-hand property owners? Following depreciation legislation changes in 2017, restrictions have affected the ability of property investors to claim tax depreciation deductions on previously used plant and equipment assets. Second-hand residential properties purchased after 7:30pm on the 9th May 2017 are not able to claim depreciation deductions for existing plant and equipment assets as they are deemed by the ATO to have been ‘previously used’. There are some exceptions to this rule which include: Commercial properties which are unaffected New properties which have never been lived in Properties where contracts exchanged before 9 May 2017 and haven’t been lived in by the owner after 30 June 2017 Substantially renovated properties Most properties have had some work completed that a current owner can claim. It’s always worth contacting a specialist Quantity Surveyor to find out how much you’re entitled to. A BMT Tax Depreciation Schedule outlines all the deductions you can claim for your property. The schedule lasts for forty years and the fee is 100 per cent tax deductible. In the FY 2018-19, BMT found our clients an average of almost $9,000 in first-year tax deductions for all residential properties. For those with properties directly affected by the 2017 legislation changes, we still found an average of $5,641 in deductions per year. There are benefits in undertaking both substantial renovations and cosmetic renovations. Often the two will complement each other and add to the overall improvement of your property. Knowing what you can claim will ensure that you obtain the maximum depreciation deductions from your investment property. BMT staff can assist you in reviewing your current circumstances and provide a tax depreciation schedule that includes a forecast of eligible depreciation claims. For a free assessment of your property, speak with one of our expert team on 1300 728 726 or Request a Quote online. To learn more, read Are home renovations tax deductible?

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Are home renovations tax deductible?

BMT team — Fri, 11 Oct 2019 03:07:49 +0000

More and more property investors are seeking to improve capital values and increase rental income by renovating their properties, rather than purchasing anew. While most investors are aware renovations can increase rental income and boost cash flow, many renovators are missing out on thousands of dollars by failing to claim depreciation deductions. In this article we will explore: Are home renovations tax deductible? What is scrapping? Important legislation for property investors Home renovation case study Are home renovations tax deductible? Most residential properties have significant depreciable value, which can be claimed prior to and after home renovations are completed. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. Depreciation can be claimed for a building’s structure via capital works deductions and for the plant and equipment assets contained within the property. While capital works can be claimed in both new and old residential property, plant and equipment deductions are limited to new property. This can affect what can and can’t be claimed when renovating. Regardless of the age of the property, it’s important to speak with a specialist Quantity Surveyor before completing any work. There may be substantial depreciation deductions available for any structural elements being removed during the renovation process. This is known as scrapping. What is scrapping? Scrapping allows you to claim depreciation deductions for the residual value of removed assets in the year the items are removed. To take advantage of deductions for scrapped assets, a depreciation schedule must be arranged both before and after the renovation takes place. The pre-renovation depreciation schedule will detail asset values and can act as evidence in the event of an Australian Taxation Office audit. Once the renovation has been undertaken, a Quantity Surveyor will compile an itemised schedule detailing the depreciation deductions available for the brand-new plant and equipment assets and capital improvements. The depreciation schedule will also show the undeducted value of the removed structural assets. Important legislation for property investors Investors who purchase second-hand residential property after 7:30pm on the 9th of May 2017 are not able to claim scrapping deductions for existing plant and equipment assets. If you exchanged contracts prior to this date, you should discuss your eligibility with a Quantity Surveyor for any residual depreciation that may apply. If you live in your rental property while renovating, any newly installed assets will also be classed as previously used. As a result, you’ll be at risk of losing your tax benefits. Unless there is good reason, investors who are planning on installing new plant and equipment assets should make these additions once the property has been listed for rent. This will ensure you are eligible to claim the maximum depreciation deductions available. Home renovation case study Jonathan purchased a ten year old two-bedroom house after 7:30pm on the 9th of May 2017. After renting his property out for a year, he decides to renovate the bathroom. According to current legislation passed in November 2017, he is ineligible to claim scrapping deductions for existing plant and equipment assets. Capital works deductions for structural assets such as tiles, bathtubs, toilets, sinks and basins are unaffected by the legislation changes and can still be claimed. These deductions typically make up 85-90 per cent of a total depreciation claim. Jonathan arranged a property depreciation schedule when he originally purchased the property. After hearing about the additional deductions available when renovating from his accountant, Jonathan contacted a Quantity Surveyor before starting work to find out more. Jonathan found he was able to use his existing depreciation schedule to work out the un-deducted value of structural assets to be removed during the renovation. The table below outlines the deductions Jonathan could claim for the removed structural assets as well as any capital improvements made during the renovation. After renovations, Jonathan was able to claim $7,830 in scrapping deductions and $333 in capital improvement deductions. Combined, this totals more than $8,000 in depreciation deductions in the first full financial year. He was able to maximise the depreciation deductions on his investment property both before and after the renovation. To maximise depreciation deductions during home renovations, consult with a specialist Quantity Surveyor before getting started.

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Lucrative assets to install when renovating

BMT team — Thu, 29 Aug 2019 01:55:17 +0000

A growing number of investors are choosing to renovate their investment properties each year. Master Builders Australia has forecast homeowners and investors will spend $8.8 billion annually on renovations over the next five years. Renovations can increase rental yields and improve cash flow however there are many important factors to consider before getting started. One of the most crucial aspects to consider is the effective life of depreciating assets. In this article we will look at: The effective life of depreciating assets Effective life of depreciating assets for flooring Effective life of depreciating assets for window covers Important depreciation legislation The effective life of depreciating assets Plant and equipment assets are items which are easily removable from the property such as carpet, hot water systems and blinds. The effective life is used to work out the asset’s decline in value for which a depreciation deduction can be claimed. Each asset also has a rate of depreciation which helps to determine the deductions an investor can claim over the asset’s effective life. Investors can claim depreciation deductions for more than 6,000 different assets recognised by the Australian Taxation Office. With so many assets to choose from, it’s important to understand how variations in effective life can alter the depreciation deductions available. We look at flooring, window covers and lighting to help you choose the most valuable assets when renovating your investment property. Effective life of depreciating assets for flooring Carpet has an effective life of eight years. Using the Diminishing Value (DV) method, a rate of 25 per cent is used. If a landlord installs carpet worth $4,000, they will be eligible to claim $1,000 in depreciation deductions in the first full financial year. However, if they install floating floorboards or tiles of the same value, the available deductions will be $533 and $100 respectively. In this scenario, an investor who installs carpet will be able to claim the highest depreciation deduction, while the investor who installs tiles will be eligible for the least. Effective life of depreciating assets for window covers Blinds have an effective life of ten years and a DV rate of 20 per cent. If a landlord purchases blinds worth $3,000, they will be eligible to claim $600 in depreciation deductions in the first full year. If they install curtains of the same value, the first-year claim would increase to almost $1,000. On the other hand, if the landlord decides to purchase plantation shutters, which have an effective life of forty years and a DV rate of 2.5 per cent, the first year deduction would be just $75. With this in mind, curtains are the most valuable asset from a tax perspective. It’s important to note that blinds and curtains may be eligible for low-value pooling. Low-value pooling is a method of depreciating plant and equipment assets which have a value of less than $1,000. Any plant and equipment assets with a value of less than $1,000 can be included in a low-value pool and written off at an accelerated rate to maximise deductions. Items can be depreciated at 18.75 per cent in the first year and 37.5 per cent each year thereafter. Important depreciation legislation It’s important to note that legislation passed in November 2017 brought about major changes to residential plant and equipment depreciation claims. Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. Therefore, the investor is potentially risking their tax benefits. Unless there is good reason, investors who are planning on installing new plant and equipment assets should make these additions after they move out of the property and it has been listed for rent. The 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective. Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are also unaffected by the legislation changes and can still be claimed by owners of income-producing properties. When removing structural assets there may be remaining depreciation deductions available. A process known as scrapping can often be applied, allowing investors to claim these deductions in the year the items are removed. To find out more, contact a specialist quantity surveyor to organise a tax depreciation schedule before starting renovations.

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Can you claim tax deductions when renovating an investment property?

BMT team — Sun, 16 Dec 2018 23:31:03 +0000

Investors who are considering buying a second-hand property often ask whether they can claim tax deductions for renovations that have been completed by a previous owner. The rules have always been complex for investors to understand and for this reason it’s best to consult with a specialist Quantity Surveyor for expert advice on the property being considered. Given the changes to depreciation legislation relating to plant and equipment found in second-hand properties passed by the federal government in November 2017, it’s now more important than ever to obtain a comprehensive depreciation schedule. In this article, we will cover: Claiming deductions for structural work Claiming deductions for previously-used assets Example scenario Claiming tax deductions for structural work The Australian Taxation Office (ATO) allows investors to claim capital works deductions in any residential building where construction commenced after the 15th of September 1987. Capital works deductions make up 85-90 per cent of a total depreciation claim. This applies to the structural items of the building and any fixed items, such as the walls, doors, windows, kitchen cupboards, retaining walls, toilets, sinks and the roof. For a residential property, investors can claim capital works deductions at a rate of 2.5 per cent per year for a maximum of forty years from the property’s completion date. Many investors think that due to these date restrictions, if a property pre-dates 1987 they won’t be eligible to claim capital works deductions. However, this is often not the case, as many investment properties built prior to 1987 have undergone some form of renovation. The ATO allows property investors to claim capital works deductions for structures added by a previous owner so long as the work is completed within the qualifying dates. The good news for investors is that the Federal Government has not changed the way capital works deductions are applied within the legislation changes. Investors can continue to claim depreciation capital works improvements made by prior owners as before. Claiming deductions for plant and equipment assets installed by previous owners Previously, under existing legislation investors could claim plant and equipment items (which are the easily removable assets for example ovens, range hoods, smoke alarms, carpets and exhaust fans) in any residential property no matter how old the building. However, under the Federal Government’s new legislation any investor who exchanges contracts on a second-hand property after 7:30pm on the 9th of May 2017 can no longer claim tax deductions on previously used plant and equipment assets installed by a previous owner. Investors can only claim depreciation on those items they purchase and add to the property themselves. It’s important to be aware that owners of newly built properties can still continue to claim plant and equipment depreciation deductions as normal. For those who exchanged contracts prior to 7:30pm on the 9th of May 2017, the legislation was grandfathered. This means these investors can continue to claim depreciation for work completed by previous owners under the pre-existing legislation. Example scenario – tax deductions for renovations completed by a previous owner The following table provides examples of some of the tax deductions an investor could claim for renovations completed to an investment property by a previous owner. In the above scenario, the investor exchanged contracts and settled on the property prior to 7:30pm on the 9th of May 2017. Therefore, they are still eligible to claim depreciation for plant and equipment additions that were made by the previous owner. They are also eligible to claim capital works deductions for structural work completed. However, if the renovations was completed in a property where the investor exchanged contracts after 7:30pm on the 9th of May 2017, the deductions would be reduced to only include the structural work completed including fixed items (such as the retaining wall, the outdoor deck, kitchen cupboards and toilet). The table below demonstrates the difference in deductions for an investor who exchanges contracts after 7:30pm on the 9th of May 2017 based on the new legislation. If an investor purchases new plant and equipment assets themselves and has these installed in a property, the depreciation for these assets can be claimed using the existing depreciation methods, no matter how old the property is or when they exchanged contracts. Learn more about scrapping here. A specialist Quantity Surveyor can ensure that an investor claims the correct depreciation deductions based on their individual scenario, including any work completed during renovations. By contacting an expert and arranging a comprehensive tax depreciation schedule, this can help an investor to ensure the deductions they claim are correct and in line with the latest policy enforced by the ATO.

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Three big benefits of renovating your investment property

BMT team — Wed, 14 Mar 2018 03:32:50 +0000

Renovating your investment property may seem like a daunting task, but making adjustments and improvements to your investment can reap rewards. Here we’ve covered three of the biggest benefits of renovating. Attract and retain quality tenants Increase sale price and capital gains Improve energy efficiency and reduce environmental impact Depreciation considerations 1. Attract and retain quality tenants Every renter has an anecdote about a landlord who would not make even the most practical or minor upgrades to the property. If you are an investment property owner and your renting days are a distant memory, it might be difficult to think from the perspective of the tenant, but it’s important not be dismissive of their ideas or concerns. Obviously the best time for renovations such as painting and recarpeting are best done when you first buy the property or between leases, but there are many minor works that renters won’t mind happening while they are there. Upgrades to ovens, air conditioning and washing machines are always welcomed by tenants. Or you could add features that will make the property more liveable such as a clothes dryer, dishwasher, or quality blinds and curtains. The flow-on effect of renovating and upgrading is that existing tenants will be happier and more comfortable, and if you are looking for tenants, you will have a wider selection of prospective tenants to choose from. By showing that you are prepared to improve a property and not just let it fall apart shows respect for your tenants and can result in positive morale which will show through in your tenant’s loyalty and desire to keep your investment in good shape. 2. Increase sale price and capital gains Renovating your property every few years will most likely improve the price when you sell. Even if you have no plans to sell, it is worthwhile consistently keeping the property up-to-date and in good condition in the event that your circumstances change and you need to sell quickly. The best way to keep your investment looking fresh is to paint the walls at least every ten years. Stained carpet and damaged floorboards makes the property less appealing, so invest in a professional clean or polishing. If the apartment is vacant, consider replacing carpet and floorboards. If you have the means, renovating the kitchen and bathroom will add significant value. It is also important to maintain the front and back yards if your tenant is not currently doing so. It is essential that you choose colours, fixtures and furnishings that won’t go out of fashion. The safest bet is to stick to neutral colours or use a consultant to guide you. By using classic colours and styles, your property will appeal to a larger range of buyers, thus increasing the selling price. 3. Improve energy efficiency and reduce environmental impact Installing solar panels might seem like a drastic and expensive outlay, but quite rapidly your current and future tenants can reap the rewards. This will make the property more appealing to tenants because the rapid rise in electricity prices is causing real financial stress for renters. In areas with consistent bright sunlight, installing solar is a great option to consider as this can add value to your investment property. Many people, in particular millennials, are becoming increasingly environmentally conscious and are renting for longer. Your tenants can also use an app to see how much power is being produced, and how much they are using, which helps them use power efficiently to reduce costs and environmental impact. If installing solar panels is not an option, there are other renovations that can reduce environmental impact. This can be as simple as double-glazing windows and providing quality blinds and curtains to retain warmth in winter and keep the home cooler in summer. If you have reverse cycle air conditioning, upgrading these units every seven years will improve energy efficiency. Depreciation considerations Keep in mind that any renovations which are completed should increase your depreciation claim for eligible items, which in turn will reduce your tax bill. You may also be eligible to ‘scrap’ any assets you’ve removed during renovations. For a free estimate of the likely depreciation deductions you could be claiming from your renovation contact our expert team today.

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The Block, low rates and spring makes for a season of increased renovation spending

Bradley Beer — Wed, 03 Sep 2014 05:53:19 +0000

Economic research undertaken for The Saturday Age suggests the popular reality television show The Block has a statistically significant impact on the economy when it comes to renovations. Spending on renovations across the nation is boosted by $251 million each time the series is broadcasted. Read the full article here. So with spring in the air, low interest rates and the current series of The Block airing on our television screens, it’s almost a given that Australians will be spending big on their renovation projects. People are investing in renovation projects on their properties as an alternative to a complete upgrade. Investment property owners are often unaware of the tax deductions available. It is possible for Australians to claim thousands back after renovating a property which generates income. See: Bradley Beer on The Block Glasshouse: Terraces Take Shape Renovations can be expensive, so it makes financial sense to take full advantage of the tax depreciation deductions available. As a building gets older, items wear out – they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a deduction. Depreciation deductions can be claimed by any property owner who obtains income from their property. To ensure property owners are making the most of the tax deductions available, they should consider a pre-renovation depreciation schedule. Old assets within a property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are removed, the owner may be entitled to claim them as a tax deduction. A Quantity Surveyor, who is qualified to calculate values and construction costs, can ensure the owners are not throwing dollars away. Essentially, if an item is removed or replaced as a result of a renovation, the current value of the item can be written-off as a tax deduction in the year the expense is incurred. Learn more: What is scrapping? A Quantity Surveyor will complete a schedule prior to a renovation or refurbishment to identify the value of all assets already existing within the property. A second schedule is then prepared after completion of the renovation, identifying the value of all new assets within the property. The removed assets can be written-off immediately. Depreciation deductions are also available for the structure of qualified buildings. Any construction (such as a new roof, walls or ceiling) carried out after September 1987 (residential property) and 20 July 1982 (non-residential property) is eligible for the capital works allowance (division 43). A Quantity Surveyor who specialises in tax depreciation will always take into consideration renovations carried out by previous owners as this becomes an additional tax benefit for the current owner. Always consult a depreciation expert about an investment property’s depreciation entitlements. Taking full advantage of the available tax benefits on an investment property can improve a property owner’s cash flow each financial year. BMT Tax Depreciation offer obligation free advice about a property’s depreciation potential pre and post renovation. Simply call 1300 728 726 to discuss any property scenario.

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Australians love to renovate

Bradley Beer — Tue, 05 Mar 2013 23:23:51 +0000

Australian spending on renovations hit $31 billion last year. People are investing in renovation projects on their properties as an alternative to a complete upgrade. TV shows such as “The Block” and “The Renovators” have become popular and are providing inspiration and ideas for home owners to renovate their properties. Property owners are often unaware of tax deductions available. It is possible for Australians to claim thousands back after renovating a property which generates income. Renovations can be expensive, so it makes financial sense to take full advantage of the tax depreciation deductions available. As a building gets older, items wear out – they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a deduction. Depreciation can be obtained by any property owner who obtains income from their property. To ensure property owners are making the most of the tax deductions available, they should consider a pre-renovation depreciation schedule. Old assets within a property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are removed, the owner may be entitled to claim them as a tax deduction. A Quantity Surveyor, who is qualified to calculate values and construction costs, can ensure the owners are not throwing dollars away. Essentially, if an item is removed or replaced as a result of a renovation, the current value of the item can be written-off as a tax deduction in the year the expense is incurred. A Quantity Surveyor will complete a schedule prior to a renovation or refurbishment to identify the value of all assets already existing within the property. A second schedule is then prepared after completion of the renovation, identifying the value of all new assets within the property. The removed assets can be written-off immediately. Depreciation deductions are also available for the structure of qualified buildings. Any construction (such as a new roof, walls or ceiling) carried out after 18 July 1985 (residential property) and 20 July 1982 (non-residential property) is eligible for the capital works allowance (Division 43).A Quantity Surveyor who specialises in tax depreciation will always take into consideration renovations carried out by previous owners as this becomes an additional tax benefit for the current owner. Always consult a depreciation expert about an investment property’s depreciation entitlements. Taking full advantage of the available tax benefits on an investment property can improve a property owner’s cash flow each financial year. BMT Tax Depreciation offer obligation free advice about a property’s depreciation potential pre and post renovation. Simply call 1300 728 726 to discuss any property scenario.

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