Depreciation schedules should be arranged before and after any renovation. If a client is considering renovating their investment property, it's important to encourage them 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. A process known as scrapping allows investors to claim these deductions 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 brandnew plant and equipment assets and capital improvements. The depreciation schedule will also show the undeducted value of the removed structural assets.
It's important to note that investors who purchase second-hand residential property after 7:30pm on the 9th of May 2017 are not be able to claim scrapping deductions for existing plant and equipment assets. Those who exchanged contracts prior to this date should discuss eligibility with their Quantity Surveyor for any residual depreciation that may apply. If an investor lives in their rental property while renovating, any newly installed assets will also be classed as previously used. As a result, the investor is at risk of losing their tax benefits.
Post 2017 depreciation legislation 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 was able to 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 prior to and after the renovation by taking a depreciation schedule to his accountant.
ABOUT THE CONTRIBUTOR
Article provided by BMT Tax Depreciation. Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation. Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.