investors – The Interiors Addict

The deductions property investors often throw away

All too often we see investors contacting specialist quantity surveyors to organise a depreciation schedule after they have completed renovations to an investment property. In most instances this is too late for the investor to claim all of the deductions they are entitled to.

If a client mentions they are considering renovating their investment property, it is important to recommend they speak to their specialist quantity surveyor straight away. This is because there may be depreciation deductions available for any disposed assets or demolished building assets being removed during the renovation process.

Property investors scrap items within a property for several reasons. The most common reason is ‘not fit for purpose’ because of obsolescence, functional inadequacy or dated style.

Essentially, if an item is scrapped it is a loss to the owner. Legislation allows property investors to claim additional deductions over and above their normal depreciation claim for assets being removed from their property. The remaining depreciable value of any scrapped items can be claimed in the year these items are removed from the property.

To take advantage of deductions for scrapped assets, a depreciation schedule must be arranged both before and after the renovation takes place. This will allow the quantity surveyor to complete a site inspection of the property to value all of the items and to take photographic records of the assets contained within the property. This evidence and the pre-renovation schedule will substantiate an investor’s claims should the Australian Taxation Office complete an audit of their annual income tax assessment.

Once the renovation has been undertaken, the quantity surveyor will compile an itemised schedule which will detail the depreciation deductions available for the new plant and equipment and capital works deductions obtainable for the owner of property.

Any removed assets identified initially will show a left over un-deducted amount in the property depreciation schedule. This amount can be claimed immediately. The new assets can then be depreciated as normal based on their effective life.

Depreciation and renovation case study

Jonathan purchased a fifty year old, two bedroom house. After renting it out for two years he decided to renovate the property. In its pre-renovation condition the house contained carpet, blinds, an oven, a cook top, ceiling fans, a split system air conditioning unit, a hot water system and light shades.

Jonathan engaged a specialist quantity surveyor to complete a property depreciation schedule when he originally purchased the property two years ago. Upon hearing about the additional deductions available when renovating from his Accountant, Jonathan contacted a quantity surveyor before starting the renovation to find out more. After obtaining information and discussing the benefits, Jonathan found that he was able to use his existing schedule to work out the un-deducted value of the items which were to be removed during the renovation.

When the original property depreciation schedule was completed, a depreciation expert visited Jonathan’s house and conducted a full site inspection. During this inspection they took notes and photographs of all depreciable items. This original schedule included all of the items being removed from the property.

The table below outlines the extra deductions that became available to Jonathan during the renovation.

Jonathan claimed $9,073 in extra deductions that year in his personal tax return. After Jonathan completed the renovation he contacted the specialist quantity surveyor to update the property depreciation schedule. They inspected Jonathan’s property again, documenting all of the new additions.

The specialist quantity surveyor calculated the construction write-off allowance now available on Jonathan’s new extension. Some of the new additions included a new oven, carpet, air-conditioning, a hot water system and blinds.

In addition to the $9,073 claimed on the removed assets, Jonathan was able to claim $8,700 in depreciation deductions on the new items in the first year alone and $29,300 in the first five years. Jonathan was able to maximise the depreciation deductions on his investment property both prior to and after the renovation by taking the depreciation schedules to his Accountant to make his claim when he completed his annual income tax assessment.

Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation. Click here for more.

How to: 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.

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

Similarly, a report from the Housing Industry Association 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.

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, lets 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.

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.

For more information please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.

–Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.