Tax Depreciation Scrapping Value

Scrapping value for Division 43

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What is a Scrapping Schedule

A dollar saved is a dollar earned.

A statement more pertinent to the investment property industry than perhaps any other

You see;

When you dispose of (chuck out) assets in your investment property they often still have a residual value.
And that residual value can be claimed as a tax deduction. A lump sum. A 100% instant asset write-off in fact.

It’s what the ATO calls the ‘scrapping value’

So what is Scrapping Value?

Scrapping value is simply the term given to the remaining value (residual value) of an item in your investment property at the time of disposal.
It does not necessarily reflect the market value for that item should you try to sell it. In many cases the scrapping value is greater than the actual market value.

what is a scrapping schedule

Every good Quantity Surveyor will provide a scrapping schedule within the tax depreciation schedule you order from them.
The scrapping schedule can be updated yearly to take advantage of the instant asset write-off for any items you’ve removed from your property in that year.

A good quantity surveyor provides these yearly updates free of charge – like we do at WRC Quantity Surveying.

Within your tax depreciation schedule you’ll find the quantity surveyor has itemised the assets you’ve removed from the property. Beside each item will be a ‘scraping value’. This will be located in the column for the financial year in which the item was scrapped.

Your account will use this value as an instant asset deduction for that financial year.

Who Determines the value of Scrapped Items?

Step 1

The value of scrapped items is determined in part by the quantity surveyor and in part by the maths at play.

what I mean by that is this:

The quantity surveyor determines the starting value of each item. Whether it be a small, readily priced item like a microwave, or a larger – hard to value item – like a 30-year old kitchen renovation

The ATO entrusts quantity surveyors to accurately and fairly price all assets in and on your property.

The values must represent a reasonable market value for division 40 items (plant and equipment) and reasonable market value for structural and permanent items (division 43).
And the quantity surveyor must be able to stand by their valuations – justifying them – should the ATO ever question them in an ATO client audit.

Note: don’t fear an ATO audit because of your tax depreciation report.
Any good quantity surveyor will ensure you are not raising any red flags at the ATO.
The same can’t be said about cheaper quality reports which often get clients into trouble with the tax man.

Step 2

Once the values have been determined and an ‘effective life’ given to each item.

Example: for carpet the effective life is 4-years with the Diminishing Value Method.
The carpet – in this instance – is then depreciated at 25% pa until the item is either depreciated down to $0 or the item has been scrapped early.

When do items get scrapped?

Items are considered scrapped when they are no longer of use in helping to produce an income from your property. And tenants can no longer benefit from use of the item

for example:
You installed a brand new hot water system in your investment property at a cost of $2,200 fully installed.
Over the next 3-years you claimed depreciation in the system at 16.66%pa in the diminishing value method (division 40).
You’ve claimed depreciation of approximately $970 – making the residual value of the hot water system $1,230.
But you had a major issue with the system and it was out of warranty. So the plumber said it’s cheaper to get a replacement unit at another $2,200. Which you do.

That means the residual value of $1,230 can be claimed as an immediate asset write-off (aka tax deduction) in the financial year that it occurred

That’s a nice lump sum deduction and a silver lining to the cloud of having to buy another hot water unit so soon.

The replacement unit may be claimable as an instant asset write-off as well.
This time under the repairs and maintenance category. So that would be another $2,200 in instant deductions for you too.

The amount of cash-back you get depends on your tax bracket and various other contributing factors.
But for simplicity’s sake;
Let’s say you are in the 37% tax bracket.
That means you’ll get that $1,230 from the scrapping schedule + $2,200 from the repairs and maintenance schedule (total $3,430) x 37%
= $1,269 cash back in tax refunds.

Not bad.

Of course it’s vital you have a quantity surveyor who knows how to apply these ATO rules to fully maximise your tax refunds.

Here at WRC quantity surveying we know exactly how to claim your depreciation Deductions to benefit you most

Simply get in touch with us here to have any of your unanswered questions cleared up.

Want to see some real world results

The best place to see what other investors are getting in tax depreciation deductions for properties similar to yours is by visiting our client portfolio page here

For further reading on more of our quantity surveyor articles click here

Or to visit our home page for Brisbane tax depreciation services click here

This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying