What will a new kitchen do for you?
Updating a kitchen can be a fantastic way to increase both your rental yield and the capital value of your investment property. We’re often asked what a new kitchen will do for depreciation deductions. Ignoring any scrapping component discussed in the adjacent article, let’s take a look at a case study.
Some of our clients recently spent just over $21,000 updating their kitchen.
It’s important to note that a kitchen comprises of two categories of depreciation; division 40 and division 43. The division 43 component is the capital allowances. Basically this covers all components that aren’t classified as plant and equipment by the ATO. In the case study, this includes the cupboards and benches, but also the drawers, handles, splash-back and sink. In many kitchen renovations you’ll also find tiles, gyprock and other division 43 assets. Of the total kitchen renovation, $14,855 consisted of these division 43 assets. All division 43 improvements of this type will depreciate at 2.5% of their total value each year, so as you can see below, it’s a pretty simple calculation.
The other component is the division 40 plant and equipment items. In this case study, they included the cook top, dishwasher, oven and range hood. You’ll note that each asset has a different effective life, which alters the depreciation percentage. Under the diminishing value, the depreciation rate is calculated by 200 divided by the effective life. You’ll note that as the range hood is under $1,000, it has been allocated to the low value pool which has it depreciating at 18.75% in the first year.
So what did the new kitchen do for this investor in the first full year? An extra $1,536 worth of tax deductions. Not bad for a typical kitchen renovation.