Tax issues

[s.w.i.s]

I am thinking of demolition my 106 yr old house and building a new house in its place. I was told that prior demolition taking place, I can get a scrap value report issued by a professional (I can't remember who does such reports) and claim its value in my tax return.

Is that true? If so what is the process called and who does such reports?

Thank you in advance!!!

 

[wobbycarly]

A quantity surveyor can give you a report to value any relatively new fixtures like kitchen stuff, etc, but you would expect no building depreciation unless there are some recent (<40 years) improvements like a verandah.

My understanding is that a "scrapping schedule" (which is an unofficial term, mind you) would only be applicable to a renovation, not a demolition - I'd suggest you check with your accountant whether this is relevant in your situation.

 

[Player]

In addition to what Rob has mentioned, I am assuming (this 106 yr old house is clear of heritage issues) is actually an IP and you're building a replacement investment asset not a home to live in.

If it's a PPOR and you're building another PPOR, then you would not be able to claim anything IMO. If it's a PPOR and you're building an IP, check with your accountant and the ATO before getting the scrapping report done.

swis, will the block take town houses or only one dwelling as you are planning?

 

[s.w.i.s]

Thanks that helps much!!!

It will take a couple of town-houses on the block. Does this change anything? I want to keep one as PPOR and rent out the other one as IP.

 

[Player]

Thanks that helps much!!!

It will take a couple of town-houses on the block. Does this change anything? I want to keep one as PPOR and rent out the other one as IP.

You may need to apportion your scrapping benefits then.

Best check with your accountant and the ATO. Maybe even a QS. Search for Depreciator on this board; may be able to help.

 

[s.w.i.s]

Thank you all for your valuable assistance and advice!!

 

[Ian (WA)]

'Evening All,

Just spent two days last week with accountant doing our extensive tax returns. Part of this was winding up a depreciation schedule on a house I have just bulldozed to be replaced by building three, 2 storey, stand-alone townouses.

So the scrapping as such is merely the closing out of an existing depreciation schedule (this is not to be confused with recouping costs of demolition which is a separate issue, some ATO stuff below in blue font regarding this).

There are a number of things to consider, i.e.

• 
  the cost of demolition of old house forms part of the Cap Gains Cost Base on the new dwellings....it can't be recouped until one or all (apportioned) of those properties are sold in future

• 
  If you salvage & then sell fixtures /fittings prior to or during demolition then depreciation on those fixtures & fittings will not be considered as part of your closing out of depreciation schedule i.e. you sold them, so tuff titties

• 
  
  Have a read of the stuff below too, just food for thought and FYI.
  
  ATO ID 2003/833
  Income Tax
  Capital works: demolition expenditure and deduction for destruction
  Issue
  
  
  Can demolition costs increase the amount of deduction allowable under section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
  
  Decision
  
  
  Yes. Demolition costs can increase the amount of deduction allowable under section 43-40 of the ITAA 1997, to the extent that these costs reduce the amounts received for disposing of the destroyed capital works, as set out in paragraph 43-255 (b) of the ITAA 1997.
  
  Facts
  
  
  The taxpayer was previously entitled to deduct an amount under Division 43 of the ITAA 1997 for a building that it owned. The taxpayer voluntarily demolished the building and was entitled to a deduction under section 43-40 of the ITAA 1997 for the destruction of capital works. The taxpayer incurred $5,000 demolition costs. The undeducted construction expenditure for the building at the date of its destruction was $50,000.
  
  Reasons for Decision
  
  
  Section 43-40 of the ITAA 1997 allows a taxpayer to immediately deduct, in the income year in which the capital works was destroyed, the amount of construction expenditure that has not yet been deducted, provided the conditions in section 43-40 are met.
  
  Expenditure on demolishing existing structures is not an amount that can contribute to a deduction for capital works under section 43-10 of the ITAA 1997. This is because it is not construction expenditure (paragraph 43-70(2)(b) of the ITAA 1997). However, such expenditure is taken into account in calculating a deduction under section 43-40 of the ITAA 1997.
  
  The amount deductible under section 43-40 of the ITAA 1997 is calculated using the method statement set out in section 43-250 of the ITAA 1997. Step 1 in section 43-250 provides that the balancing deduction amount is the undeducted construction expenditure for the destroyed capital works that exceeds the amounts you have received, or have a right to receive, for the destruction of the capital works.
  
  Section 43-255 of the ITAA 1997 provides that the amounts you have received or have a right to receive for the destruction of the capital works include:
  
  (a)
  an amount received under an insurance policy or otherwise for the destruction of the capital works, and
  (b)
  an amount received for disposing of any property salvaged from the demolition, less any demolition expenditure incurred on the property.
  Thus, in calculating the balancing deduction under section 43-250 of the ITAA 1997, demolition expenditure acts to offset the lessening of deduction that occurs because of the fact that an amount has been received for disposing of the destroyed capital works.
  
  The following examples illustrate the operation of sections 43-250 and 43-255 of the ITAA 1997 where different amounts are received for disposing of destroyed capital works. Step 2 in section 43-250 of the ITAA 1997 does not apply.
  
  Example 1
  
  The taxpayer did not receive any amount for the destruction of the building, but did receive $6,000 salvage receipts for disposing of the destroyed building. The reduction amount calculated as being received for the destruction under section 43-255 of the ITAA 1997 is $1,000. This amount is calculated under paragraph 43-255(b) of the ITAA 1997 as the $6,000 received for disposing of the property less the $5,000 demolition costs.
  
  The balancing amount under section 43-250 of the ITAA 1997 is $49,000 ($50,000-$1,000).
  
  Example 2
  
  The taxpayer did not receive any amount for the destruction of the building, but did receive $4,000 salvage receipts for disposing of the destroyed building. The reduction amount calculated as being received for the destruction under section 43-255 of the ITAA 1997 is zero. This amount is calculated under paragraph 43-255(b) of the ITAA 1997 by reducing the $4,000 received amount to zero by the demolition expenditure of $5,000. The $1,000 excess of demolition expenditure over the amount received for disposing of the destroyed building is not deductible under Division 43 of the ITAA 1997.
  
  The balancing deduction amount under section 43-250 of the ITAA 1997 is $50,000 ($50,000-$0).
  
  There may be capital gains tax implications under Part 3-1 of the ITAA 1997 for the balance of the demolition expenditure incurred that is not taken into account in calculating the balancing deduction under section 43-250 of the ITAA 1997 (in this example, $1,000).
  
  Example 3
  
  The taxpayer did not receive any amount for the destruction of the building, and did not receive any amounts for disposing of the destroyed building. The reduction amount calculated as being received for the destruction under section 43-255 of the ITAA 1997 is zero. The $5,000 excess of demolition expenditure over the amount received for disposing of the destroyed building is not deductible under Division 43 of the ITAA 1997.
  
  The balancing deduction under section 43-250 of the ITAA 1997 is $50,000 ($50,000 - $0).
  
  There may be capital gains tax implications under Part 3-1 of the ITAA 1997 for the balance of the demolition expenditure incurred (in this example, $5,000).
  
  Example 4
  
  The taxpayer received an amount under an insurance policy of $1,000 for the destruction of the building and salvage receipts of $1,000 for disposing of the destroyed building. The amount received under paragraph 43-255(a) of the ITAA 1997 is $1,000. The amount received under paragraph 43-255(b) of the ITAA 1997 is zero. This latter amount is the $1,000 salvage receipts reduced by the $5,000 demolition expenditure amount. The $4,000 excess of demolition expenditure over the amount received for disposing of the destroyed building is not deductible under Division 43 of the ITAA 1997. The sum of the amounts in paragraphs 43-255(a) and (b) is $1,000.
  
  The balancing deduction under section 43-250 of the ITAA 1997 is 49,000 ($50,000 - $1,000).
  
  There may be capital gains tax implications under Part 3-1 of the ITAA 1997 for the balance of the demolition expenditure incurred (in this example, $4,000).
  
  Date of decision: 29 August 2003
  
  

• 
  Also, generally if you sign up a demo company, you will sign a clause to say that nothing can be removed or slavaged by yourself, so if you're going to try and milk every last dollar by trying to flog off bits of your house on ebay, do it before you sign up a demo contractor.

For further info, perhaps do a search on the forum for 'scrapping' and also try 'balancing deductions'......dunno what's there, but try your luck.

Cheers Ian.