Don’t be strapped for cash, scrap for cash

Add value and increase deductions when renovating

Australians have always had a passion for renovating property and recent predictions on renovation spending for 2016 suggest this trend will continue.

Are you planning on completing a renovation to your investment property? Before you start work, talk to a Quantity Surveyor about claiming deductions for assets being removed. Discover how a kitchen renovation provided one investor with $6,957 in deductions.

Data from the Commonwealth Bank Future Home Insights Series forecasts that renovation spending will top $32 billion in 2016 alone. This equates to 36 per cent of total spending on residential construction for detached houses including alterations and additions.

Similarly, a report from the Housing Industry Association (HIA) estimated that around 213,000 kitchens and 429,400 bathrooms were installed in Australia during the 2015-2016 financial year.

While these predictions demonstrate that owners are not afraid to spend money to improve the value of their homes and rental properties, often property investors may not be aware of the implications that renovations will have on their depreciation deductions.

Whether an investor updates a kitchen, bathroom or simply replaces the carpets or hot water system in a property, the removal of these assets will affect a depreciation claim.


Scrapping allows investors to claim the total remaining depreciable value for items which are thrown away in the year of their removal.


Renovations affect depreciation deductions in two ways. Firstly, an investor should note that any items removed may have a remaining un-deducted depreciable value which they are entitled to claim when the item is removed.

This process, known as scrapping, allows investors to claim the total remaining depreciable value for items which are thrown away in the year of their removal.

Investors must also factor in deductions they can claim for new items they add to the property.

Assets will be captured by a depreciation specialist during a pre-renovation inspection. After the renovation is completed, a new depreciation schedule is then prepared listing all new additions that have been added and the existing depreciable items which will remain in the property.

To show how depreciation deductions are affected during a renovation, let’s look at the following example.

An investor purchased a property one year ago. Originally constructed in 1992, the property was beginning to show signs of wear and tear.

Upon purchase, the investor rented out the property and engaged BMT Tax Depreciation to prepare a depreciation schedule. After owning the property for twelve months, the investor decided to install a new kitchen to improve future rental income and increase the equity held in the property.

Outlined in the owner’s original existing depreciation schedule were items discovered during the first site inspection including a stove, blinds, light fittings, a rangehood, a dishwasher, a sink, tiled floors, cupboards and joinery.

The tables below show the original value of items and the depreciation deductions that could be claimed in the first full financial year. They also show the remaining un-deducted value of items after the first year’s claim was made.

Plant and equipment assets
Item
Original value (estimated by BMT in the original schedule)
Claim first year
Remaining un-deducted value after owning the property for one year (available to be scrapped)
Stove $1,360 $227 $1,133
Blinds $580 $116 $464
Light shades $420 $168 $252
Rangehood $510 $85 $425
Dishwasher $920 $184 $736
Total $3,790 $780 $3,010

Assumptions and Disclaimer

Deductions for assets have been calculated using the diminishing value method of depreciation. It is important to note that the owner decided not to use a low-value pool because assets lose their identity in a pool and the remaining un-deducted value can be difficult to determine when renovating.


Capital works deductions
Item
Original value (estimated by BMT in the original schedule)
Claim first year to 01/07/2016
Remaining un-deducted value after owning the property for one year (available to be scrapped)
Cupboards and joinery $4,800 $120 *$1,920
Tiles $800 $20 *$320
Sink $239 $6 *$96
Total $5,839 $146 *$2,336

Assumptions and Disclaimer

Capital works deductions are calculated at a rate of 2.5 per cent each year for forty years.
*Note that as the property was originally constructed in 1992, the remaining un-deducted value is calculated by removing the total claimable amount for the 24 year period from 1992 to 2016.


This investor could claim $780 for plant and equipment depreciation and $146 in capital works deductions, a combined total depreciation deduction of $926 in the first full financial year for the kitchen alone.

They can also claim the remaining un-deducted value of $3,010 for plant and equipment and $2,336 for capital works for items removed and scrapped during the renovation in the financial year of their removal.

BMT found that the newly installed kitchen would result in $1,611 in deductions for the owner in the year it is installed. Therefore a total of $6,957 could be claimed for the removed assets and the depreciation of the new kitchen.

Additional depreciation deductions are also available for structures and assets found in the rest of the property.

To avoid throwing thousands of dollars away in existing items and to ensure deductions for new items are captured it is essential to speak to a Quantity Surveyor before you start your renovation.