Brad Beer from BMT Tax Depreciation Quantity Surveyors explains how, when you are renovating, you may be able to get tax benefit from what you throw away.
Kevin: Brad Beer from BMT Tax Depreciation joins me once again. Brad, thanks again for your time.
Brad: Thanks, Kevin.
Kevin: I’m enjoying these conversations about tax depreciation schedules. It’s an area that certainly I needed a lot of education on, and I guess a lot of investors do, as well.
Can I ask you the question about older properties? Can I claim depreciation on older properties?
Brad: Most definitely, Kevin. Older properties still get depreciation. It’s a common question. People think it’s too old. Always ring; ask the question.
Older properties don’t get as much depreciation as newer ones. That’s definitely the case. The age will impact on how much you can claim, but it doesn’t mean you can’t claim anything. If it’s not as much, but it’s still deductions, we’ll tell you how much we think it will be before you go ahead. That starter part to find out an estimate is free.
Kevin: When I was talking to my accountant last time, he mentioned a building write off and depreciation of plant and equipment. What are the differences there?
Brad: Depreciation – we blanket call it that, but it’s split up into two areas.
The building write off is a deduction that relates to the structure of a building. It’s normally 2.5% of the construction cost each year. This is where the age does matter. It needs to be built after a certain date in order to claim this.
The other part is the plant and equipment. This is the soft stuff: carpets, hot water service, blinds, stoves, curtains, things that don’t last as long. The ATO allows us to claim these things quicker based on an effective life, and there are no age restrictions on these things. There’s no special date that says you can or can’t claim them.
Kevin: Now, as a renovator, someone who’s going to renovate a property, how does depreciation change during that process?
Brad: Depreciation is something that gets claimed on the things that are there. If you renovate and change what’s there, then you’re adding some new stuff, so there are more things to depreciate.
But in addition to that, the things that were there that you did throw away often have some value, as well, so you want to call the quantity surveyor first and make sure that you’ve assessed what’s there, because sometimes you’re able to scrap or write off the residual value of the existing stuff, as well. Sometimes that can mean quite a few dollars. Do it before the renovation and a little update after for the new things that you’ve put in.
Kevin: Tell me about scrapping. Does the Tax Office recognize scrapping reports?
Brad: We don’t actually call them a scrapping report. The fact is that “scrapping” is a word that makes it easy to understand what you’re doing. What it really is is writing off the residual value of items. It’s really just a depreciation schedule with a value on items.
You rent the property out for a period of time, and then you decide to throw some of these things away; they still had some value left, and you get to claim it in that year that you throw them away as opposed to continuing to depreciate them.
Kevin: What things can’t be depreciated, Brad?
Brad: Anything that’s not directly related to construction and part of the construction of the property. Things like soft landscaping and demolition are nondeductible items. Pretty much most other things that relate to construction, to you creating an income from this property have some sort of depreciation in value. Also, the land is something you don’t depreciate as well.
Kevin: What about repairs? How do they differ from improvements?
Brad: Repairs and also maintenance are things that you get to claim straight away at 100% in the year that you actually do them. Improvements are things that improve the property. When you replace things in the property with something better, you’re improving the property, so those things need to be depreciated.
We’ll talk to the accountant on those things – which ones they want to claim as repairs and maintenance, and which ones are capital improvements that we need to depreciate and prepare the reports appropriately.
Kevin: Yes. You mentioned the accountant there. It’s quite normal to work in conjunction with my accountant in these cases?
Brad: Most definitely. We only provide the accountant with really one number for the whole tax return. The accountant still does the tax return; we’re just the specialists in this area, in maximizing a depreciation.
It also takes the risk away from the accountant because the ATO will accept the estimates done by a quantity surveyor for the purpose of these depreciation claims.
Kevin: A few more questions I want to ask you, Brad, so we’ll get you to come back. I want to find out about how you claim removal of hazardous items like asbestos, which we’re seeing a lot of now, and also about my own labor, whether I can claim that.
Brad Beer from BMT Tax Depreciation Quantity Surveyors is our guest, and they are the people we recommend you talk to. The website to contact them is bmtqs.com.au.
Brad, thanks again for your time.
Brad: Thank you very much, Kevin.