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.
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 (forty years).
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 Brisbane.
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 cook top, 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.
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.
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