Can I claim tax deductions when renovating or extending my house?
If you are looking to renovate an investment property, you will want to consider getting a scrapping report to immediately deduct assets you plan on demolishing or throwing away. Assets that are to be thrown away or “scrapped” can be claimed for 100% of their current value as a loss and offset your taxable income. This will assist with an investors cash flow since the offset can come back as a tax return as opposed to simply throwing away or demolishing the asset.
Before performing a renovation, an investor can call a Quantity Surveyor to create a scrapping report detailing the remaining residual value of the items in the property with how much they will depreciate each year. By doing so the investor will have a record of how much an asset is currently worth and will be worth over the duration of the asset’s life should they need to scrap the asset when they do decide to perform the renovations. Alternatively, the values shown in a depreciation schedule can similarly be used since a scrapping report and a tax depreciation report are essentially the same.
By claiming on the scrapped assets as a loss, you can claim these as a tax deduction which in turn allows you to claim tax back. This will help with your cash flow and can even potentially help investment properties that are negatively geared have a positive cash flow. The amount you receive back is dependent on the tax bracket you are in. Let’s say you are in the 32.5% tax bracket as an example. Scrapping an asset with a residual value of $1000 and claiming it as a loss will allow for 32.5% of that value to be claimed back meaning $325 will come back as a tax return.
From the previous example, as opposed to just losing an asset that is at the end of its effective life, by claiming it as a loss, you can increase your cash flow while performing necessary expenditures from doing renovations. A more in-depth example is provided below illustrating the benefits on a client’s cash flow after they got a scrapping report for a future kitchen renovation.
George bought an investment property in 2009 and is looking to perform a renovation to his old kitchen and is part of the 37% tax bracket. He engaged with us at Duo Tax Quantity Surveyors in 2016 to get a scrapping report for his property in preparation for the renovation. After getting the report he found the following relevant residual figures for his kitchen assets:
He then decides to go through with the renovations during the 2017 financial year. Without the scrapping report, George would have had to throw away the scrapped assets with no return. Since he got the report however, he was eligible to claim the depreciation of the assets during the 2016 financial year meaning a deduction of $315 and claim the remaining residual value of each of the assets upon scrapping the assets which is $1365. Adding this with the initial depreciation of the assets, George can claim $1680 as a loss over two years from kitchen assets that he was planning on throwing away meaning he would get back $621.60 as a tax refund increasing his cash flow.
Obtaining a scrapping report is even more relevant when refurbishing or demolishing fit-out in a property which is particularly relevant in the commercial industry. A fit-out left by a previous tenant of a commercial property which needs to be thrown away by the owner can be turned from a liability into an asset after getting a scrapping report. Rather than just paying the fees to have a company remove the fit-out, a scrapping report can be obtained in conjunction to immediately write-off the fit-out as a loss which can turn these liabilities into a pseudo-asset. You might think there is not much residual value left but the ATO states that capital works items depreciate at 2.5% over 40 years. This means if the fit-out is 10 years old, there are parts of the fit-out that can still be claimed for 75% of its original value.
It is important to contact a Quantity Surveyor before performing a renovation or have plenty of photos on hand prior to the renovation. Quantity Surveyors will ensure that the property gets a proper inspection and provide the maximum claim for your assets.
Disclaimer: the availability and eligibility of deductions needs to be confirmed by a registered tax agent that is providing taxation services. Duo Tax Quantity Surveyors share case studies shared by our client pool and as such you will need to confirm with your accountant prior to organizing a report with us to discuss eligibility as this is not tax advice.
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