Well, I’ve got to be honest…it’s a made up term because a “Scrapping Schedule” sounds a lot better than the ATO’s “residual value write-off deduction”.
Don’t you agree?
Basically, “scrapping” is claiming a deduction for plant and equipment items (ovens, dishwashers etc) and capital works deductions (bricks, concrete etc.) when you throw them away or demolish them.
More often than not, these items are still attached to a residual value that can be claimed by the owner, provided the use of the item prior to be being scrapped was to generate income from the item.
From a depreciation point of view, scrapping can be financially beneficial because you can basically claim any balance of depreciation in the year that you remove it.
Let me give you an example:
Say you bought a property built in 1993 – and Washington Brown valued the kitchen when brand new at $10,000.
Fast forward to 2013, you’ve owned the investment property for 5 years but it’s dated and you want to upgrade so you put in a new one.
Well, a kitchen, according to the ATO, should last for 40 years.
But you’re removing this one after 20.
So instead of claiming all the deductions you were going to be entitled to you – you only claim half of them. So you get to claim the other half when you remove it.
When you put in the new kitchen – the depreciation on it starts again – so you get another 40 years on the new one!
Just remember, the item needs to be income producing prior to it being ripped out AND the property needs to be income producing after the renovation has occurred in order for you to claim the residual value of that item.
When in doubt, get a Quantity Surveyor to inspect your property before you demolish any major items!