Investors often renovate their properties, particularly if they were constructed some time ago and show signs of wear and tear. While these projects can prove costly, there are ways to reduce the expense by maximising the tax deductions.
The tax office allows investors to claim deductions for the wear and tear of their building and the plant and equipment. Deductions for structural items can be claimed at a rate of 2.5% a year for 40 years while plant and equipment depreciate based on an individual effective life set by the ATO.
A tax depreciation schedule from a specialist quantity surveyor will help ensure deductions for wear and tear or depreciation are maximised. The schedule will outline all the deductions available for the owner to make their depreciation claim with their accountant each financial year.
Where an investor later decides to renovate, this can produce deductions in addition to those outlined in the depreciation schedule.
A process known as “scrapping” allows investors to claim any remaining depreciation available for assets or structures removed from a property in the financial year of their removal when renovating.
For example, an investor decided to renovate the kitchen of an investment property that had been purchased and rented out a year ago. In this scenario, BMT Tax Depreciation discovered the owner could claim a total of $3010 in residual depreciation for removed plant and equipment items such as a stove, blinds, light shades and a dishwasher. As the property was constructed in 1992, the owner could also claim the remaining 24 years of depreciation for structural items removed from the kitchen including the cupboards and joinery, tiles and sink.
This resulted in a claim of $2336 for the owner.
When the renovation was completed, BMT reassessed the property and found $1611 in deductions for newly installed items. In total, the owner could claim $6957 in deductions for the kitchen alone.
By maximising depreciation and taking advantage of scrapping, the investor recouped some of the costs of renovating the kitchen.
Renovations may also improve an investor’s chances of securing and retaining the best tenant and possibly increasing their rent.
It is recommended that investors consult a specialist quantity surveyor before and after a renovation to maximise their depreciation benefits.
Bradley Beer is the CEO of BMT Tax Depreciation