Explained: tax depreciation and scrapping

What is a tax depreciation report and why get one?

A tax depreciation report or schedule is an absolute must for any smart property investor. Nearly every property and its fittings can be depreciated, yet research suggests that only 20 per cent of investors fully utilise and take advantage of the available tax depreciation benefits of their investment property.

Tax depreciation (also known as property depreciation) is a legitimate deduction against assessable taxable income, generated by a residential or commercial investment property. It works by allowing property investors to deduct a portion of the original costs of:

• Plant and equipment such as furniture and fittings (Division 40) and
• Capital works such as renovations (Division 43). 

These deductions can be made on an investment property each financial year, over the effective life of that item. To obtain a tax depreciation report that is accepted by the ATO, an appropriately qualified professional, such as a quantity surveyor, must be engaged and will work together with your tax accountant.

What is scrapping?
Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, demolition of existing items or building onsite that would have been eligible to claim deductions.

How do investors benefit by scrapping?

Scrapping of existing structures onsite is a very effective method of obtaining significant deductions. It can provide additional tax credits for investors who are renovating or demolishing. Items that may be scrapped include:
• Air conditioning units
• Heating and hot water units
• Carpet and vinyl floor coverings
• Stoves
• Lighting fixtures
• Dishwashers
• Security systems

Essentially, if an item is scrapped the amount that is yet to be written off for a particular asset (the residual value) can generally be claimed as a 100% tax deduction in the financial year that it is disposed.

Prepare in advance

• Obtain a depreciation report from a quantity surveyor at the time you purchase an investment property, so you know what items are eligible for immediate depreciation claims
• Do the same before you renovate your investment property to understand eligible deductions from “scrapping” existing structures.

For more information view the ATO’s Guide to Rental Properties or speak with your tax accountant and a qualified property surveyor such as BMT Quantity Surveyors: www.bmtqs.com.au