Scrapping depreciable assets is a fantastic way to claim deductions as an asset reaches the end of its practical use. Essentially it’s a simple process but we’ve had a number of calls from investors confused by terms like ‘scrapping schedules’. The difference between a depreciation schedule and a scrapping schedule is practically nothing, other than the fact that a scrapping schedule may only include assets that have been, or will be thrown away. In essence, if you’ve been renting your property for a while and decide to throw away something like the carpet in favour of an upgrade, you can claim the residual value of the carpet as a 100% deduction. In other words, if the carpet was worth $800 at the time it was thrown in the bin, it means you’re able to take $800 off your taxable income in the year in which the carpet was disposed of. There are certainly some nuances to scrapping, but it’s a fairly straightforward process.
Some companies are suggesting that you need a standalone scrapping report, and a separate report once the renovations have been completed. Whilst this might be the easiest way to approach the deductions, it may not be the most cost effective method, nor even necessary. Each case is different but it’s important to understand that any schedule can in theory become a scrapping schedule if you’ve decided to dispose of all of your plant and equipment assets.
Without going into too much detail, there are two important things to consider;
- The asset can no longer be used. In riveting ATO speak this means;
“Once a taxpayer has scrapped or abandoned an asset, there is a presumption it can no longer be used by anyone for the relevant purposes. The scrapping of an asset demonstrates that the asset is either physically exhausted or obsolete. A taxpayer may abandon an asset if it is too difficult or costly to remove it from its place of operation.”
For example, you cannot remove a hot water system from an investment property, claim the residual value (scrapping value), and then install the hot water system in a new investment property and continue to claim the depreciation as normal.
- In a newly purchased investment property, there must be an intention to rent the property as is.
In other words, the ATO states that purchasing an investment property with the intention to renovate it immediately and dispose of the assets, does not fit their criteria for being eligible for scrapping deductions. If you purchased an older property and rented it out for say 12 months, then decide to renovate, this is a different matter and would allow you to claim 100% of the residual asset value of items that have been thrown away due to obsolescence, i.e. ‘scrap’ them.
To take a look at what scrapping can mean for your deductions in real terms, take a look at the analysis in this table featured here http://bit.ly/1k8WKRK which shows the scrapped values and the deductions associated with the replacement assets as well. If you have any questions, we’re always happy to assist!