Scrapping - Tax deductions

[MTR]

Can anyone help with this question.

I am currently demolishing a house and a fellow investor mentioned that I could claim as much as 70-80K depending on the (QS) report.

My plan to demolish and strata the land into 2 lots and on sell. I would welcome any way that I can reduce my tax liability on this project.

I have never heard of this before, found this information below

What is scrapping?

Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, it is the demolition of any existing structure or fixture onsite that would have been eligible to claim deductions for depreciation. Scrapping of existing structures onsite is a very effective method of obtaining deductions within our tax system. It can provide additional tax credits for investors who demolish or dispose of existing buildings or any part of it which were owned as an investment asset and eligible to produce income.

Essentially, if an item is scrapped the amount that is yet to be written off for a particular asset (the residual value) can generally be claimed as a 100% tax deduction at the time of disposal.


Any help from tax experts on this would be appreciated.

Cheers
MTR

 

[stumpie]

Can anyone help with this question.

I am currently demolishing a house and a fellow investor mentioned that I could claim as much as 70-80K depending on the (QS) report.

My plan to demolish and strata the land into 2 lots and on sell. I would welcome any way that I can reduce my tax liability on this project.

I have never heard of this before, found this information below

What is scrapping?

Scrapping is the removal and disposal of any potentially depreciable assets from an investment property. In other words, it is the demolition of any existing structure or fixture onsite that would have been eligible to claim deductions for depreciation. Scrapping of existing structures onsite is a very effective method of obtaining deductions within our tax system. It can provide additional tax credits for investors who demolish or dispose of existing buildings or any part of it which were owned as an investment asset and eligible to produce income.

Essentially, if an item is scrapped the amount that is yet to be written off for a particular asset (the residual value) can generally be claimed as a 100% tax deduction at the time of disposal.


Any help from tax experts on this would be appreciated.

Cheers
MTR

MTR

I'm talking to a scott from depreciator about this right now, as i'm in a similar position except my prop is very old and really nothing left to be written off. if the building is post 1985 you may still have values to be written off. The other condition for a building or plant to be scrapped is the IP needed to have been income producing. so if you bought a property with a building that is post 1985 and demolished it before renting it out then you technically cannot claim the capital allowance or depreciation that remains to be written off. Perhaps Paul from Price Financial or Scott from Depreciator could chime in here.

 

[rooky]

Hi MTR,

Look at this thread by Paul.

http://somersoft.com/forums/showthread.php?t=102349

 

[Paul@PFI]

Scrapping and claiming a write off requires some diligence or you could mistakenly claim a deduction you are not entitled to.

In your case you aren't renting on each side of the build. That changes things.

Prior to ceasing to rent you may reassess the effective life of P&E assets. On tenant vacancy the issue of the building scrapping is a further issue. Scrapping the building if it has a "book" value (ie QS report) may not actually provide a deduction.

Personal tax advice is recommended

 

[MTR]

I will be contacting a QS today, this particular property was rented for 6 months and age, maybe 1980, large house

I did demolish another property in February this year and was not aware of this, property had been rented for 6 months, currently building 3 villas, so I stuffed here, shame my accountant never even mentioned it.

Thanks
MTR

 

[rooky]

I will be contacting a QS today, this particular property was rented for 6 months and age, maybe 1980, large house

I did demolish another property in February this year and was not aware of this, property had been rented for 6 months, currently building 3 villas, so I stuffed here, shame my accountant never even mentioned it.

Thanks
MTR

Well, MTR, if you remember sometime back when you posted your convesation with your accountant regarding margin scheme for GST, I told you that your accountant is not upto the task. Not being judgemental about your accountant but they are most important professional for us and it sucks when they do not provide good advice. Having said that, I have found that sometime its communication issue also i.e. we do not explain our situation well enough to them.

Just reminding you and others on forum that how much great service Paul provides for me. He gave me correct advice for margin scheme ( I had asked 3 accountants before him and all gave vague answers) and scrapping. Moreover he has always replied to me within 60 minutes.

 

[depreciator]

Remember when it comes to claiming the disposal value of buildings, renovations also count. So if it's an old house with a recent reno, there is value it. Just be sure to talk to someone before the bulldozer arrives on site.

 

[MTR]

Definitely Rooky, I believe communication is imperative, some accountants are very anal, not you Paul you are great....

Also, one thing that must be considered with this strategy is are you selling or holding etc. I am looking at selling all my stock for the first year so no need to do this, I guess my accountant new this??

However, future developments will possibly be a different story and will keep this one up my sleeve.

MTR

 

[Paul@PFI]

Well, MTR, if you remember sometime back when you posted your convesation with your accountant regarding margin scheme for GST, I told you that your accountant is not upto the task. Not being judgemental about your accountant but they are most important professional for us and it sucks when they do not provide good advice. Having said that, I have found that sometime its communication issue also i.e. we do not explain our situation well enough to them.

Just reminding you and others on forum that how much great service Paul provides for me. He gave me correct advice for margin scheme ( I had asked 3 accountants before him and all gave vague answers) and scrapping. Moreover he has always replied to me within 60 minutes.

Thanks Rooky...I get annoyed that most accountants tell you they know about property. But most don't. Very few are truly property savvy. Sure they know about claiming rental deductions, neg gearing etc. That's the easy bits.

Margin scheme, ordinary income issues, CGT complexities, scrapping, valuation issues and dates, when to NOT use cost base adjustment for capital allowances, MR exemptions, land tax, duties, strategies, strategies and strategy etc etc...

I tell all SSers who I speak to that any accountant can bang numbers into a PC and throw a tax return out. That's so easy. (But you wont know if its wrong) H&R Blocks $79 return is worth exactly that. It what goes through my two ears before I touch the keyboard or the advice that follows during the meeting / year that adds value. Its one of the reasons I DONT encourage face to face returns. Its a time waster for both of us. I find I draft a return THEN we discuss it etc and address any questions etc makes it far more productive. Who wants to look at my mug anyway ?

 

[MTR]

Thanks Paul, agreed.
My accountant is also a developer, he knows the ropes but for some reason he thinks I know what he knows, that is the problem I believe.

 

[westminster]

MTR do you have a depreciation report for the property so you can claim depreciation for the time it is/was tenanted?

I'm a big believer in depreciation and all it's benefits.

I recall my holiday reading one year was Scott's (depreciator) e-book on depreciation - hubby laughed, but then it's taken me 3yrs to convince him to depreciate his CIPs.

It's a MUST read http://www.depreciator.com.au/ebook-download.html

 

[BMT Tax Depreciation]

Hi MTR,

Just to add two cents from another QS firm, it does sound like scrapping is not for you in this case. I talked to a lady on the phone an hour ago who was planning a demo and was then going to subdivide the land and just sell it. I told her she wasn't eligible for scrapping and would like to reiterate what Paul said: there needs to be some way of demonstrating that the property was income producing or at least available for it on BOTH sides of the reno/demo. The sale of the land and/or new buildings would not count as income in this case.

Chris

 

[MTR]

Thanks Chris
I was chatting to someone from BMT, not you
In this instance not suitable, but will certainly be looking at this down the track with other projects, in particular if I decide to hold stock.

Cheers
MTR

 

[kristaje]

Just reminding you and others on forum that how much great service Paul provides for me. He gave me correct advice for margin scheme ( I had asked 3 accountants before him and all gave vague answers) and scrapping. Moreover he has always replied to me within 60 minutes.

I'd like to second Rooky's statement above re. Paul. We have a rather complex structures involving personal names, unit trust with on loan agreement, family trust and smsf, and currently non-resident for tax purposes. Paul is very much on the ball with all our queries, saved us from costly mistakes and is very easy to communicate with via email - with us living overseas. We're lucky to have met him (though not yet in person)

 

[Ausprop]

yet another tick to develop and hold and black mark to develop and sell.

 

[WilliamB]

Interesting one. Maybe.

If the property was rented and only ever an IP up until the time demo occurred, there was some value still attributable to the structure at the time of demo, and the intention was to build two, sell one, and retain one as an IP, would some or all of the scrapping still be possible?

I'd guess half of the value possibly. Obviously will speak to my accountant, but i'd be interested to know what the gurus here think.

Cheers

 

[westminster]

Interesting one. Maybe.

If the property was rented and only ever an IP up until the time demo occurred, there was some value still attributable to the structure at the time of demo, and the intention was to build two, sell one, and retain one as an IP, would some or all of the scrapping still be possible?

I'd guess half of the value possibly. Obviously will speak to my accountant, but i'd be interested to know what the gurus here think.

Cheers

I'm curious too about this.

 

[Paul@PFI]

Interesting one. Maybe.

If the property was rented and only ever an IP up until the time demo occurred, there was some value still attributable to the structure at the time of demo, and the intention was to build two, sell one, and retain one as an IP, would some or all of the scrapping still be possible?

I'd guess half of the value possibly. Obviously will speak to my accountant, but i'd be interested to know what the gurus here think.

Cheers

YES - Maybe depending when built. The scrapping will affect the trading stock value for the one being sold. It may mean MORE profit at ordinary rates. The demolished structure doesn't transfer to the cost base of the new build. A strategy to trigger CGT at a discount may even be considered and refresh the trading stock value and reduce profit.

 

[MTR]

yet another tick to develop and hold and black mark to develop and sell.

I agree Aus, but sometimes it is attractive to sell, especially when you can sell off land and take the profits and reinvest as opposed to waiting 12 months to complete a build. Lots of factors to consider, such as markets turning etc.

 

[MTR]

Have I now missed the boat, is there anyway around this??

I was renting a property for 12 months, I then demolished the house no depreciation schedule on this property as I was planning to build/sell all of the 3 villas.

Current scenario has changed, I would like to sell 2 villas and hold 1.