Look beyond the obvious when calculating tax deductions
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Investors often find themselves disposing of old depreciable assets from their property when doing renovations. Can they still claim these as tax deductions following the recent changes in tax depreciation regulations?
The process of removing assets with residual value during renovations is referred to as ‘scrapping’—renovators are usually able to claim the said value as a tax deduction. However, according to BMT Tax Depreciation’s Bradley Beer, the benefits of scrapping value may not be as attractive considering the new tax depreciation scheme.
Under the new scheme, planted equipment depreciation deductions will be limited to outlays obtained by investors—meaning, you have to personally acquire the items for you to claim depreciation on them. Therefore, secondhand “planted” items such as the carpet, stove, blinds and curtains will have no depreciation value.
If you signed your purchasing contract prior to the Budget date, the 9th of May, then the scrapping value on your items will not be affected.
Otherwise, Mr Beer explained: “The things that you were going to throw away and scrap, if they were already there when you bought the property and they’re secondhand, then there will be no deduction associated with those.”
Meanwhile, new items installed or put in the renovated property will be depreciable.
“In relation to the new things nothing's changed. We update the depreciation schedule, fix it up, and claim those deductions,” the quantity surveyor highlighted.
Despite this change, Mr Beer said investors have nothing much to worry about. After all, scrapping value is only considered as a bonus, especially as a deduction accessible only when renovating or disposing of certain items from your property.
He encouraged everyone to ultimately consider the fundamentals of property investment when making important decisions—from buying, holding, and renting to renovations and developments.
Mr Beer said: “I don't think you're going to go out tomorrow and say, ‘I'm going to completely change my investment strategy because I don't get to scrap’. Scrap was a bonus. It was [a] great little kicker.”
“The fundamentals of why you're investing in that particular property and doing what you're doing haven't changed, except for a little bit of cash flow in that period of time,” he added.
A depreciation schedule is a comprehensive report on the claimable deductions on your property, usually prepared by a quantity surveyor before purchase.
In the case of renovations, Mr Beer said investors can opt to request for an updated depreciation schedule after the project if it’s only a simple renovation. Alternatively, you can do it with your accountant if it’s minimal, like adding a new stove.
“You can do it yourself with [a] minimal amount of items, but if we need to split it up, put things in the right place, we need to have a look at it,” according to him.
Essentially, even after the changes in tax depreciation has been finalised last November, Mr Beer encouraged investors to go through the same process to be able to maximise the deductions they can get. Most of the deductions are still there and the importance of an accurate depreciation schedule will always remain, he said.
The only difference now is, aside from the usual criteria, tax agents will have to ask a few more questions to take the new rules into account.
Mr Beer explained: “The difference will be that there are some properties based on age that may not be worth it. We just got to add a few more questions now and assess whether it's a valuable exercise before we run out there and do the depreciation schedule.”
If you are unsure of how things work following the implementation of the said changes, he strongly recommended getting in touch with the right professionals to be able to make the best decisions.
“Lots of questions we get around, ‘Is it still worth it? Can we get it?’ Well, [to do] your depreciation properly, you should still go through the same process and ask yourself the same questions,” the quantity surveyor concluded.
Tune in to Bradley Beer’s episode on The Smart Property Investment Show to know more the tax complications which recent changes to depreciation law will have for investors.