The decline of the scrapping schedule — How depreciation changes have impacted scrapping

The May 2017 budget heralded the largest change to depreciation rules since 2006, it certainly ruined what would have been a perfectly good glass of shiraz as I sat watching Scott Morrison at home.

For anyone lucky enough to have been busy doing something interesting on the evening of the 9^th of May 2017 rather than trolling through budget papers like yours truly, the treasurer announced that plant and equipment deductions would no longer exist for 2^nd hand properties.

To put it another way, if you buy an investment property that’s not brand new, you won’t be able to claim deductions on blinds, carpets, cooktops, hot water systems, ovens and the like.

The only way you’ll receive these plant and equipment deductions is through a brand-new purchase or installing the asset yourself such as with a renovation.

The changes further complicate matters by asserting that even if you buy new, if one day you decide to live in the property, there will be zero plant and equipment deductions available from that day forward.

One common practice that was also affected by the budget changes is scrapping

Scrapping, or scrapping schedules are one of those things that have rooted themselves within the investors mind. 

It’s funny how certain parts of depreciation laws and nuances are more memorable than others, but scrapping is something that people ask me about all the time.

Scrapping is essentially the practise of claiming the residual value of an asset when it’s worn out and needs to be thrown away.

So, you buy an investment property with some carpet and three years later you throw it away, the depreciation schedule shows a residual value of $200, so you get an instant $200 tax deduction when you dump the carpet into the bin.

Typically, people would buy an older investment property, rent it out for 6-12 months and then complete a renovation.

Often we’d see thousands of dollars’ worth of scrapping deductions.

I’ve raged against the term scrapping schedule for a few years because it’s exactly the same thing as a normal depreciation schedule, it’s just the way in which it is used that differs.

Some cheeky companies convince you that you need a scrapping schedule and then a depreciation schedule post renovation, but it’s normally easy to kill two birds with one schedule as it were.

However, the scrapping schedule is mostly on its way out anyway with these budget changes. 

The main reason you’d have a scrapping schedule is when you buy and old investment property and complete a renovation.

Now with the depreciation changes, existing plant and equipment items will not qualify for deductions, so there would be no scrapping deductions available on an old property.

Even with so called grandfathered properties where you exchanged prior to 9/5/2017, unless you rented out the property in the 2016/2017 year, you’re not truly grandfathered.

This is more significant than people think as our research is showing that 22.4% of our clients are occupying the property prior to renting it out.

So, there are really only two ways scrapping is going to be available.

I’ve ordered them in likeliness;

1. You bought the investment property prior to 9/5/2017 and it’s always been rented, and you decide to complete a renovation.
2. You bought a brand-new property, and you rent it out long enough for things to wear out and you renovate and hold.

It is possible to scrap building components, but this is not common due to the capital gains tax implications. 

Granted these two situations above don’t appear terribly unlikely, but the stats are telling us that people don’t hold a property much more than 6-7 years on average and that almost a quarter of people live in their property straight away, so these circumstances are far less common than the old strategy of just buying and old place and doing it up.

So scrapping practices are likely to be far less common under these new depreciation rules, but not impossible.

It’s likely though that you’ll have the original cost information yourself, so may not need a quantity surveyor such as myself anymore.

My advice is always free though and don’t worry, I’ve still got plenty of other work to do!

About Mike Mortlock Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular property commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at www.mcgqs.com.au