BMT Tax Depreciation outline what scrapping is and demonstrate how a hotel in Perth improved its cash flow by more than one million dollars from scrapping their room fit-outs.
For hotels to retain high occupancy it’s important their fit-outs reflect current styles and trends, particularly with regard to furniture,décor, kitchens and bathrooms.
Upgrading fit-outs can be a costly process, however with scrapping and current government incentives available like temporary full expensing there’s never been a better time to upgrade.
Here, BMT Tax Depreciation outline what scrapping is and demonstrate how a hotel in Perth improved its cash flow by more than one million dollars from scrapping their room fit-outs.
What is scrapping?
Scrapping is the un-claimed or un-deducted depreciable value of an asset at the time of removal.
Scrapping value = original depreciable value – deducted value to date
For example, if the original value of an asset was $3,000, and $1,000 in depreciation was claimed by the time of the asset’s disposal, the ‘scrapping value’ would be $2,000. The owner could then claim the $2,000 as an instant tax deduction in the same financial year as removal.
Scrapping is especially common in spaces where the aesthetics and function of a fit-out can stimulate customer spending, such as in clothing stores, restaurants and hotels.
Government depreciaiton incentives
The Australian Government introduced various incentives and policies to boost ecnomic growth and support businesses throughout the COVID-19 pandemic.
These incentives include temporary full expensing, increased asset write-off and backing business investment. Under temporary full expensing eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready to use for a taxable purpose. Find more information on the available incentives here.
Under temporary full expensing business owners have a unique opportunity where they can accelerate deductions by writing off both the ‘scrapped’ value of the assets as well as the total amount of new plant and equipment assets.
The following case study outlines how scrapping can significantly boost a hotel’s cash flow.
Case study: Royal Hotel
‘Royal Hotel’ is located in Perth. The hotel was purchased in 2020, is owner operated and has 100 rooms. In 2022 the owners upgraded their hotel room fit-outs to preparefor the forecasted travel growth once travel restrictions eased.
The following table demonstrates the capital works deductions and plant and equipment assets scrapped and depreciated for the remaining value.
As we can see because the owners of Royal Hotel scrapped these assets they lowered their taxable income by an additional $1,239,076 (on top of their depreciation claim).
By applying temporary full expensing Royal Hotel was able to immediately deduct the full cost of all newly upgraded assets as well, which totalled over 1.5 million dollars.
It’s important to speak with an expert quantity surveyor before removing any assets so they can capture the assets available for depreciation deductions.
BMT Tax Depreciation has been specialising in commercial depreciation for over twenty years. BMT apply all industry-specific legislation to ensure commercial depreciation deductions are claimed to their full potential and compliantly.
To learn more about how scrapping can improve your business’s cash flow call BMT on 1300 728 726 or Request a Quote.
The information provided in this article is of general use only and should not be used as a quote or advice. BMT recommend consulting an accountant before making financial decisions. Contact BMT for a specialised tax depreciation schedule.