How To Maximise Future Tax Deductions When Renovating

Ren­ov­ate and prosper

With shows such as ‘The Block’ and ‘House Rules’ inspir­ing a wave of ren­ov­at­ors, many prop­erty investors have con­sidered whether they too should do some renov­a­tion work to their invest­ment property.

Though investors know com­plet­ing a renov­a­tion will add value to their prop­erty and pos­sibly even increase the weekly rental value, they are often unaware of the addi­tional tax deduc­tions available.

The Aus­tralian Tax­a­tion Office (ATO) allows prop­erty investors to claim a deduc­tion due to the wear and tear of a build­ing struc­ture and its fix­tures over time. This claim is called depre­ci­ation. Though investors can claim depre­ci­ation on any income pro­du­cing prop­erty, it is par­tic­u­larly import­ant to claim depre­ci­ation dur­ing a renovation.

Assets removed dur­ing a renov­a­tion pro­ject can be worth thou­sands of dol­lars, and repla­cing them can be expens­ive. It makes fin­an­cial sense to take full advant­age of the tax depre­ci­ation deduc­tions avail­able.

For invest­ment prop­erty own­ers think­ing about renov­at­ing, here are some of the must know facts:

1. Arrange a tax depre­ci­ation sched­ule before start­ing any work

Renov­a­tions can provide sig­ni­fic­ant deduc­tions over and above those received dur­ing a nor­mal depre­ci­ation claim. This is because the owner may be entitled to claim a deduc­tion for any depre­ciable assets that are removed and dis­posed of dur­ing a renov­a­tion. This pro­cess, called ‘scrap­ping’, allows investors to claim the remain­ing depre­ciable value of items removed from a prop­erty as a tax deduc­tion in the year the item is scrapped.

Before and after DIY renovation

When renov­at­ing, a tax depre­ci­ation sched­ule must be com­pleted before any work is star­ted, as this sched­ule will sup­port the own­ers claim in any case where an audit is reques­ted by the ATO. Prior to com­plet­ing the tax depre­ci­ation sched­ule, a Quant­ity Sur­veyor should always arrange a site inspec­tion of the prop­erty to value all of the items con­tained within the prop­erty and take pho­to­graphic records before the items are removed.

2. Install new assets that max­im­ise future deductions

When an owner is decid­ing which parts of their invest­ment prop­erty to ren­ov­ate, they should con­sider the depre­ci­ation deduc­tions that will become avail­able once new items have been installed. Choos­ing which assets to use when renov­at­ing can make a sub­stan­tial dif­fer­ence to the deduc­tions the owner receives in future tax returns. This is because the depre­ci­ation avail­able for each asset is cal­cu­lated based on its indi­vidual effect­ive life as set by the ATO.

For example, the deduc­tions avail­able in the first full year depre­ci­ation claim for car­pets, float­ing tim­ber floors and tiles dif­fer quite sub­stan­tially. If an owner has decided to install new floor­ing to the value of $2,000, but is unsure which floor­ing type to install, the deduc­tions which will become avail­able to them may assist in mak­ing a decision. By choos­ing to install $2,000 in car­pets rather than float­ing tim­ber or tiles, the owner will earn $400 in depre­ci­ation deduc­tions in the first year. This is in com­par­ison with $267 in depre­ci­ation from float­ing floor­boards or $50 in depre­ci­ation from tiles, assum­ing the first year is a full fin­an­cial year.

3. Arrange a tax depre­ci­ation sched­ule after work is completed

After a renov­a­tion has been com­pleted, a second tax depre­ci­ation sched­ule should be pre­pared. The sched­ule should show any removed assets iden­ti­fied in the ori­ginal sched­ule and the remain­ing depre­ciable amount that can be claimed for these items as an imme­di­ate deduction.

The new sched­ule should also detail the depre­ci­ation deduc­tions avail­able for all newly installed plant and equip­ment assets or cap­ital works expendit­ure as well as the depre­ci­ation deduc­tions for any ori­ginal assets remain­ing for the life of the prop­erty (40 years).

Seven Hills Case Study

The fol­low­ing scen­ario shows how one investor was able to bene­fit from the addi­tional deduc­tions received when renov­at­ing their invest­ment property.

Kelly pur­chased a fifty year old, two bed­room house in Seven Hills NSW. After rent­ing it out for two years, Kelly decided to ren­ov­ate her prop­erty. In its pre renov­a­tion con­di­tion, the house con­tained car­pet, blinds, an oven, a cook­top, ceil­ing fans, an air-conditioning unit, a hot water sys­tem and light shades.

When Kelly ori­gin­ally pur­chased the prop­erty two years ago she engaged a Quant­ity Sur­veyor to com­plete a tax depre­ci­ation sched­ule. After hear­ing about the addi­tional deduc­tions avail­able when renov­at­ing, Kelly con­tac­ted BMT Tax Depre­ci­ation to find out more. Kelly found that she was able to use her exist­ing depre­ci­ation sched­ule to work out the remain­ing depre­ciable value of items which were to be removed dur­ing the renovation.

When the ori­ginal depre­ci­ation sched­ule was com­pleted, a depre­ci­ation expert vis­ited Kelly’s house and con­duc­ted a full site inspec­tion. Dur­ing this inspec­tion they took notes and pho­to­graphic images of all the depre­ciable items con­tained in the property.

The below table out­lines the ori­ginal value of each asset iden­ti­fied in the ori­ginal depre­ci­ation sched­ule and the remain­ing un-deducted depre­ciable value for these items that could be claimed instantly once these items were removed from the prop­erty and scrapped.

Item Ori­ginal value of each asset (iden­ti­fied  in the ori­ginal report) Claim­able value after two years of depre­ci­ation (un-deducted value)
Air con­di­tioner – split system $2,855 $1,827
Car­pet $3,155 $2,019
Hot water system $1,755 $1,219
Oven $1,525 $1,059
Blinds $2,455 $1,571
Light shades $865 $554
Cook­top $675 $469
Ceil­ing fans $985 $355
Total $14,270 $9,073

Once the renov­a­tion was com­pleted, Kelly would be able to claim $9,073 in addi­tional deduc­tions in her per­sonal tax return that year. Kelly also reques­ted for BMT Tax Depre­ci­ation to update the depre­ci­ation sched­ule for her prop­erty. A depre­ci­ation expert vis­ited the prop­erty to per­form a second site inspec­tion and take new evid­en­tiary pho­tos and notes about the new additions.

A Quant­ity Sur­veyor then cal­cu­lated the con­struc­tion write-off allow­ance now avail­able on Kellie’s new exten­sion. New assets also included an oven, an air-conditioning unit, a hot water sys­tem and blinds. In addi­tion to the $9,073 claimed on the removed assets, Kelly was able to claim $8,700 in depre­ci­ation deduc­tions for the newly installed items in the first year alone and $29,300 in the first five years.

Con­sult with a cred­ible pro­vider of tax depre­ci­ation schedules

Cal­cu­lat­ing depre­ci­ation dur­ing a renov­a­tion is a com­plic­ated pro­cess which requires the expert­ise of a spe­cial­ist Quant­ity Surveyor.

No mat­ter what asset an owner is con­sid­er­ing improv­ing, it is worth­while con­tact­ing a Quant­ity Sur­veyor such as BMT Tax Depre­ci­ation for oblig­a­tion free advice on the property’s depre­ci­ation poten­tial pre and post renovation.

The qual­i­fied team at BMT metic­u­lously pre­pare and cus­tom­ise every depre­ci­ation sched­ule to ensure prop­erty investors claim every deduc­tion they are entitled to.

Prop­erty own­ers who would like a free over the phone assess­ment of avail­able deduc­tions they can claim should con­tact BMT Tax Depre­ci­ation on 1300 728 726.

About 

Brad­ley Beer is Man­aging Dir­ector of BMT Tax Depre­ci­ation. Brad has over 15 years exper­i­ence in the prop­erty depre­ci­ation, build­ing and con­struc­tion industry. Brad is act­ively involved in edu­cat­ing prop­erty investors and property-related organ­isa­tions about the import­ance of tax depreciation.

Brad is a reg­u­lar key­note speaker and presenter cov­er­ing prop­erty depre­ci­ation ser­vices on tele­vi­sion, radio, at con­fer­ences and exhib­i­tions Australia-wide. Some of these include:
* Prop­erty Expos — Aus­tralia Wide
* National Tax & Account­ants Asso­ci­ation
* Defence Hous­ing Aus­tralia
* Tax­a­tion Insti­tute of Aus­tralia
* Real Estate Insti­tute Aus­tralia
* Reg­u­lar train­ing events for national cor­por­ate real estate groups
* Reg­u­lar appear­ances on Fox­tel Pro­gram Your Money Your Call shown on Sky News Busi­ness Channel.

Brad­ley Beer (B. Con. Mgt, AAIQS, MRICS) is the Man­aging Dir­ector of BMT Tax Depre­ci­ation. Please con­tact 1300 728 726 or visit www.bmtqs.com.au for an Aus­tralia wide service.

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