Capital works deduction and destruction

There has been a few discussions on this but mainly for specific circumstances. We usually get caught into what is repair vs capital in the discussions, but not talk as much regarding the deduction for old asset being removed.

Building depreciation is covered under Division 43 of the tax act. s43-40 allows deduction for destruction of capital works (either voluntarily or involuntarily).

Where the new spend is not a repair, eg. replacing a fence, whilst the new spend will be deductible over its life, the item being removed should be available for immediate deduction if the building is used for producing assessable income.

Eg. quantity surveyor tells you the old fence was $5k worth of future deduction, and you replace it now by spending $8k to upgrade, how will this be treated?

My take is that the $8k new fence spend will be capital works and no immediate deduction is available for that. It will be depreciated.
The old fence will be immediately deductible under s43-40, ie immediate $5k write-off (unless you claimed a portion of it as normal depreciation in a past income year).

So on a net basis, I am only carrying forward $3k worth of deductions, making my repair vs capital argument less important.

If there is an insurance claim for involuntary destruction, that is a separate matter.

But where we do renovations/upgrades, etc - s43-40 should be considered.

Does anyone have any concerns regarding this?
 
You are referring to what is commonly called "scrapping". Provided the old asset and new asset relate to production of assessable income then yes it would be written off and claimed as a Capital Allowance item. For example demo of old IP fence around time it becomes a PPOR isn't eligible.

However the problem can be one of "specific identification"...Unlike plant & equipment which has a schedule describing precise assets with Div 43 its basically an all up number. A all inclusive number based on the QS estimate of construction cost. So determining the fence write off (A Div 43 structure) may be impossible unless the taxpayer had records to determine its cost and date installed AND then reduce it for 2.5% pa to the date of destruction.

I like to keep a clear schedule of all additions to Div43 and CGT cost base for all tax clients to assist such issues as this. That way I can identify the new fence from 10 years back and its present written down value for Div 43.

I wonder if any QS consider if its worth splitting Div43 down so that likely replaceable items (hard landscape/ retaining, pergola, fence etc) can be better identified ? Would it be worth it ?
 
Very valid points. Often we see on the Capital Works schedule from the depreciation companies, 'additional works' etc. but no detail of what this actually is. Surely if there is enough information to provide a construction date and a cost, then they should be able to identify the asset involved.

I'll be interested to hear the point of view of the depreciation pro's on this one as to why they don't breakdown the Capital Works into specific assets, even if the general larger ones like fences, pergolas etc., as these would be the ones that are 'scrapped' most often.
 
I'll be interested to hear the point of view of the depreciation pro's on this one as to why they don't breakdown the Capital Works into specific assets, even if the general larger ones like fences, pergolas etc., as these would be the ones that are 'scrapped' most often.

The problem is the list would be endless.

Kitchens and bathrooms are the Cap Works we see disposed of most. But sometimes not the whole room. And there are dozens of bits that make up a kitchen.

We do a couple of letters every week for clients who have disposed of stuff. It's not a big deal and if they are clients we don't charge.
 
If a significant item is scrapped then for a small tax deductible fee the taxpayer can ask the QS to itemise/estimate that scrapped item.

i have applied this once. But was easier in the sense it was done within same tax year so no additional fee was paid. After first tenancy, and while the depn report was yet to be done, i had the QS estimate cost of the scrapped item and not include in depn report but advise me separately for scrapping purposes.

I think Div 43 rules accept such estimates for substantiation purposes.

on a related note, it will affect cost base for cgt purposes.

The problem is the list would be endless.

Kitchens and bathrooms are the Cap Works we see disposed of most. But sometimes not the whole room. And there are dozens of bits that make up a kitchen.

We do a couple of letters every week for clients who have disposed of stuff. It's not a big deal and if they are clients we don't charge.
 
The problem is the list would be endless.

Kitchens and bathrooms are the Cap Works we see disposed of most. But sometimes not the whole room. And there are dozens of bits that make up a kitchen.

Exactly what Depreciator said. I read this thread last night just before I was about to clock off and thought, "Jeez, where would we start?" I must admit I raised my eyebrows when Paul said "likely replaceable items" because that is a long list. It was also interesting that the aforementioned items were suggested to be landscaping items, whereas my mind leapt immediately to kitchens and bathrooms, and items like cabinetry and tiling.

The issue is: where would we stop? Every time we would arrive at the list of "likely replaceable items" a client would deal us another curveball. I'm afraid this one's in the too-hard basket, for the most part. Like Depreciator, though, we're always happy to assist with the scrap and, for capital works, our cost is minimal if indeed there is one.
 
Chris - Thanks for that. I did suspect I might generate that issue in replies and I would have to agree that it would snowball and - where would it end ?

So the answer may be that a QS report contains extensive value and sometime having a quality QS report by a firm that offers great customer service may be a bonus. Talk to them and they may be able to maximise the deductions for little or even no extra costs.

That's a great answer. A key point of difference between a "cheapie" report and a business that is focussed on tax based reports. ie Scott from Depreciator, deppro and BMT, WB etc...
 
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