Getting rid of something can improve your cash flow…up front (via a scrapping schedule).
Renovating an investment property benefits the property investor in many financial ways. Tax benefits and methods include residual value write-off and tax depreciation schedules. Detailed below are tips to minimise tax and improve the cash flow of your property investment.
Property investors wishing to renovate their property usually do so to add capital value, attract better clients and improve rental income. In regards to tax purposes, according to the ATO, property that is used for income-producing purposes has tax-deductible expenses. Some of these expenses can be claimed immediately, as well as year-on-year, over numerous years. In this instance, both positively geared and negatively geared properties would benefit from these deductions.
What can a property investor claim?
Depreciation for properties (technically referred to as Capital Allowance for Plant & Equipment and Capital Works Deductions), by way of a Tax Depreciation Schedule report, is one way property investors can make tax claims year-on-year, over numerous years (can be up to 40 years and in some case far exceeding this, with added on capital works).
Items that fall under the Capital Allowance category includes kitchen appliances, window treatments (blinds curtains, shutters etc.), carpets etc. In fact, the Commissioner of Taxation stipulates almost 200 items that incur capital allowances for residential property investors alone. Other property types i.e commercial can even have more! Deductions for Capital Works are another expense that a residential property investor can claim for.
Capital Works are those works that incur construction expenditure e.g. those of a structural nature. They include such things as the erection of buildings, extensions, alterations or improvements and structural improvements. Therefore, deduction for capital works is construction expenditure in respect of construction of capital works. For a property investor to make the most of both capital allowances for plant & equipment and deductions of capital works, a quantity surveyor (who is also a registered tax agent) would be engaged to physically inspect the property and produce a tax depreciation schedule. The ATO states (TR 97/25) ‘a quantity surveyor to be appropriately qualified’ to provide estimates in relation to producing tax depreciation schedules.
Pre-Renovation claims i.e. Scrapping Schedule/Residual Value Write-Off (immediate write-off items)
With any property renovation, there will always be a demolition component and removal of items. Although demolition costs are not claimable in tax depreciation schedules, property investors may have the potential to claim for the ‘residual value of items’ for disposal. Known as Residual Value Write-Off Deductions. Sometimes referred to as ‘scrapping’, (not an ATO term, but used by some quantity surveyors). What does this mean?
Residual Value Write-Off Deductions means the ‘value left in tax claimable items’ that can be written off immediately, in the financial year of disposal against the taxpayer’s tax. I.e the capital allowances for plant & equipment and capital works deductions items in the property investment that the property investor can write-off against their income tax statements, with the ATO, in the relevant financial year.
For example, the property investor plans to renovate a kitchen and rip out the twenty-year-old styled and installed kitchen cabinets and benchtops. Such cabinets and benchtops being replaced will potentially still have about 20 years of depreciation remaining, (based on an allowed 40 years of depreciation). Say the cabinets and benchtops cost $20,000 to install (a reasonable install price for a basic kitchen cupboard arrangement and benchtops). The residual value of those items could amount to around $10,000. This amount can be written-off by the property investor immediately in the financial year that they were disposed of, i.e. The complete $10,000 amount against their tax in that same financial year!
Without the property investor’s knowledge of ‘Residual Value Write-Off Deductions, such items would otherwise be forfeited by the property investor. BWK Group has clients that have benefited by over $20,000 in immediate claims
It is therefore prudent to engage a suitable quantity surveyor to undertake a pre-renovation inspection in order to capture, quantity and value the pre-renovation residual value items write-off items.
Post-Renovation
Post-renovation, it is wise to also have a depreciation schedule for the new assets and ‘works’ completed following the renovation.
Engaging an experienced Quantity Surveyor (QS) and Registered Tax Agent is your first step following a renovation for investment purposes. A physical inspection by a QS of the property in order to produce a comprehensive tax depreciation schedule report helps to maximise the deductions and allowances that the property investor can claim. These deductions and allowances can amass hundreds of thousands of dollars in tax savings and potential cash returns (case studies found here).
Although renovations are a great way to add extra capital value to the property investment, it is unwise to over-capitalise. There needs to be a balance struck. As explained above, there are deductions and capital allowances available to the property investor but the property investor should have a strategy and explore all avenues that would benefit their cash flow position and become accustomed to correct record keeping to monitor your results.
When undertaking renovation works, be prudent with your record-keeping. This includes documenting costs and trade invoices as these can be used for tax depreciation purposes. In any case an experienced and suitable quantity surveyor can assist.
Engage an experienced Quantity Surveyor/ Registered Tax Agent
Who values and estimates the building and construction works and items? An experienced quantity surveyor.
The right quantity surveyor will further add value and make it possible for the property investor to maximise their property investment.
This includes all the items for depreciation / even though they are being replaced. Not to mention, the aforementioned is in addition to all the other capital allowance and deductions for capital works and plant & equipment (over 200 items in a residential property) via a comprehensive Tax Depreciation Schedule (including a physical inspection a suitably experienced quantity surveyor). This is required to achieve tax benefit results regarding the said property investment for the property investor.
In summary
Having an investment renovation goal is important. An investment renovation goal may include increase in capital value, attracting a better client and more rental income is important. In the same fashion, having the correct tax information to maximse the potential of your investment property is equally important. All property investors should take advantage of depreciation deductions and allowances due to them with their income producing properties. This undertaking minimises tax and improves cash flow for the property investor.
Informed renovating property investors can further maximise the financial impact of their property investment renovation by chatting to a Quantity Surveyor.
Engaging the correct quantity surveyor, to undertake physically inspection of the property and to produce a comprehensive tax depreciation schedule (accounting for items pre and post renovation of the property investment) is the best bet to add another financial benefit of renovating and owning a property investment for the investor.
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Have questions? Start here, Tax Depreciation FAQ
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