The depreciation difference: kitchen and bathroom renovations
This week the Housing Industry Association (HIA) released the HIA-GWA Kitchens and Bathrooms Report for 2013/14 and it presents some interesting implications for depreciation deductions.
Blogger: Mike Mortlock, MCG Quantity Surveyors
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Over the years the report has provided some great insights into the frequency of kitchen and bathroom renovations, the average cost of the works and the total value of these works across Australia.
In recent years, the kitchen and bathroom industry has suffered due to a number of factors which have since turned around. With interest rates at all-time lows, the weakening of the Australian Dollar (AUD) and the improving international market conditions, there has been an increase in new dwelling commencements of almost 10 per cent over 2013.
The renovations side of the market has fared a little worse due to poor household sentiment and a long period of sideways tracking dwelling prices. More recent developments point to a positive outlook allowing for greater scope for renovations.
Some of the key findings in the report are outlined below:
• In 2012/13 the total number of kitchen installations in new homes increased by 11.7 per cent, outperforming the forecast this time last year of a rise of 2.6 per cent. The number of installations is forecast to increase by 2.8 per cent in 2013/14 to a level of 166,500.
• The total value of kitchen installations in new homes was $3.29 billion in 2012/13, not only a 10.4 per cent increase compared to the previous year, but also a record high. The total value is forecast to fall by 5.8 per cent this financial year with growth of 2.7 per cent in 2014/15 and 3.5 per cent in 2015/16 taking the total value back to $3.29 billion
• The total number of bathroom installations in new homes is forecast to rise by 2.8 per cent from 311,000 in 2012/13 to 319,600 in 2013/14.
• The total value of bathroom installations in new homes was $4.11 billion in 2012/13, a decline of 8.9 per cent from the previous year. The total value is forecast to rise by 2.5 per cent in in 2013/14 and again in each of the following two years; 3.3 per cent in 2014/15 and 3.9 per cent in 2015/16. This would take the total value to a record $4.53 billion.
Of particular to interest to us as quantity surveyors is the average value for a new kitchen. The HIA survey found the average for 2012/13 was $18,271, which was only marginally lower than the average value of a kitchen renovation at $19,123. Over 2012/13 74 per cent of kitchen renovations were made to kitchens between 11-20 years old.
Bathroom survey figures showed that the average value for a new bathroom was $13,986, compared to a renovation of $15,122, with 70 per cent of bathroom renovations being on bathrooms between 11-20 years old.
For property investors who have purchased properties constructed prior to the division 43 (capital allowance) cut-off date, it’s important to note here that the stats are clearly showing that even if the original property does not attract depreciation claim on the building structure, it’s quite likely that some form of renovation, either kitchen, bathroom or both has been carried out.
We’re frequently preparing depreciation reports for properties built prior to September 1987 which result in a significant amount of deductions based on the renovations carried out by previous owners over the years.
Based on the HIA survey figures, an average kitchen renovation alone is likely to return around $1,000 worth of depreciation deductions per year over the first 5 years. This estimate is based on the kitchen having a cooktop, oven, range hood and dishwasher and is calculated under the diminishing method.
We encourage all property investors to make contact with a qualified quantity surveyor to discuss whether it’s worthwhile having a depreciation schedule completed. Most will offer a minimum guarantee of deductions to ensure you only pay for a report that puts more money back in your pocket than what it costs you. What have you got to lose other than missed tax deductions?
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