Renovating a rental: scrapped plant, the low-value pool and demolished capital works

A renovation does two things to a rental property's depreciation. It takes things out: carpet, an oven, a cooktop, a hot water system, the old kitchen's cupboards, a bathroom's walls and tiling. And it puts new things in. What is taken out is dealt with in the year it goes, under Division 40 of the Income Tax Assessment Act 1997 for plant and equipment and Division 43 for capital works; what is put in starts deductions of its own. This guide sets out what the Act does with each, and where the 2017 rules for previously used plant change the answer.

Scrapping an item of plant is a balancing adjustment event. One occurs when you stop holding a depreciating asset, as when an old oven goes to the tip, or when you stop using it and expect never to use it again, even if it is kept in the garage (section 40-295(1)). The item's termination value is then set against its adjustable value, what is left of its cost after the decline in value already worked out. Where the termination value is the less, the difference is deductible in the income year of the event; where it is the more, the difference is assessable income (section 40-285(1) and (2)). Either way the item's adjustable value is then nil (section 40-285(3)).

The termination value is generally what is received for the item, such as a sale price or what a dealer pays for scrap (section 40-305), so an item thrown away for nothing generally has none. An item kept but never to be used again takes its market value when its use stopped, and one lost or destroyed takes what is received under an insurance policy or otherwise for the loss (section 40-300(2), items 1 and 8). An item written off in full in the year it was bought, at $300 or less (section 40-80(2)), has nothing left to deduct, so what it fetches, if anything, is assessable.

An item allocated to a low-value pool is no longer depreciated on its own. A low-cost asset, one that cost less than $1,000, can go into the pool in the year it is first used, and an item on diminishing value whose opening adjustable value has fallen under $1,000 can join it later (section 40-425). The pool deducts 18.75% of each new low-cost asset's cost in its first year and 37.5% a year of the pool's balance (section 40-440), and once an item is in the pool it stays there (section 40-430(2)).

So scrapping a pooled item gives no deduction of its own. When a balancing adjustment event happens to an asset in the pool, the pool's closing balance for the year is reduced, though not below nil, by the taxable use percentage of the asset's termination value, and anything over the balance is assessable income (section 40-445). An item thrown away for nothing takes nothing off the balance: what is left of its cost stays in the pool and goes on being deducted at 37.5% a year with the rest. One sold for something brings the balance down by its share of the price, which slows the pool's later deductions rather than adding to income, unless the price is more than the whole balance.

Plant that came with a second-hand residential property, or that was used while the property was the owner's home, is generally not deductible for an individual, a self-managed super fund or most trusts who acquired it at or after 7.30 pm on 9 May 2017 (section 40-27). Scrapping it does not turn that decline into a deduction. Section 40-291 reduces the balancing adjustment for an item whose deductions section 40-27 reduced, in the proportion those reductions bear to the item's whole decline in value since it was acquired. For an item none of whose decline could be deducted, that is all of it: throwing away a cooktop that came with an established property gives its buyer no balancing deduction.

What it gives instead is a capital gain or loss. A balancing adjustment event for an item that was, at some time, used for the purpose section 40-27 deals with, or for a purpose other than a taxable one, is CGT event K7 (section 104-235(1)). The capital loss is the amount by which the item's cost exceeds its termination value, in the proportion of its decline in value that sections 40-25 and 40-27 kept from being deducted (section 104-240(2)): for an item wholly shut out, its cost less anything received for it. A capital loss reduces capital gains, in its year or carried forward to a later one, and a net capital loss cannot be deducted from other income (sections 102-5 and 102-10(2)). This is why a schedule still values the plant it cannot deduct: its cost is what the loss is worked out from.

The building and each renovation to it are capital works, and pulling part of them down ends that part's deductions. Section 43-40 gives a deduction, in the income year the destruction occurs, where all or part of the capital works is destroyed and some of its construction expenditure is still undeducted, provided a deduction under Division 43 has been allowed or can be claimed for it, and it was being used to produce assessable income immediately before (or nobody has used it for anything since). A part demolished in a renovation is generally treated as destroyed. What it costs to demolish is not added to that deduction: it only reduces what is counted as received for the destruction, and not below nil (section 43-255).

The deduction is the undeducted construction expenditure for the part destroyed, less what is received or receivable for its destruction: an amount received under an insurance policy or otherwise, and what is received for disposing of its materials, less any demolition expenditure (sections 43-250 and 43-255). It is reduced further, by a reasonable amount, where the part was at some time used only partly to produce income or was not deductible to whoever owned it, as when an earlier owner lived in the house (section 43-250, Step 2). The undeducted expenditure is what is left of the part's cost after the rate's daily amount for every day since it was first used after completion, whoever used it (sections 43-235 and 43-240), so it falls the same way whether or not each year was claimed.

Where the part pulled down belongs to the original building, as the bathroom walls and tiling of a house built in 2003 would, the deduction is for the share of the building's undeducted cost that relates to that part, which generally has to be estimated by a quantity surveyor or another appropriately qualified person. Construction begun before 18 July 1985 was never deductible, and work whose deduction years have run out has nothing undeducted, so neither gives anything when it is pulled down.

Take that house, bought by an individual after 9 May 2017 and let ever since. An earlier owner replaced its kitchen in 2008, which by our cost database's typical allowance cost about $16,160 then. At the start of the 2026–27 income year the owner pulls that kitchen out and puts in a new one. Taking the old kitchen as finished on 30 June 2008, as our year pages do, and let or available for rent from the next day on, its 2.5% a year has run for 18 income years, 6,574 days, leaving about $8,884 of its cost undeducted. If nothing is received for what is taken out, that is deductible for 2026–27 under section 43-40, and the old kitchen's deductions end there. The new kitchen, about $30,371 at 2025 prices in our cost database, is new capital works: 2.5% of its cost, about $759 a year, for 40 years from its completion.

The appliances go too. The cooktop and rangehood came with the house, so for this owner they are previously used plant: their decline in value was never deductible, scrapping them gives no balancing deduction, and each makes a capital loss of its cost to the owner, less anything received for it. The owner had bought the oven new at the start of 2021–22, for about $1,677 at 2021 prices, with an effective life of 12 years. Thrown away after five whole income years, on prime cost its adjustable value of $977 is deductible in 2026–27. On diminishing value its adjustable value fell under $1,000 at the end of its third year, at $970. If the owner then moved it into a low-value pool, as our schedules do, scrapping it gives no deduction of its own, and what is left of it goes on being deducted in the pool; kept out of the pool, its adjustable value after five years, $673, is deductible instead.

The new oven, about $1,891 at 2025 prices, is deductible from the day it is installed ready for use, over its 12 years under diminishing value or prime cost. These figures are for illustration, to show how each part of a renovation is dealt with; they are no estimate for any property, and what each part cost, when it goes and what it fetches are the owner's own.

It does not matter who carried out the work being pulled down. Capital works deductions follow the building, so a kitchen, bathroom or extension an earlier owner put in is deductible to a later owner for what is left of its years, and its undeducted cost when it is demolished, provided its construction expenditure can be worked out. Where nobody kept the invoices, an appropriately qualified person can estimate it from what the work was and when it was done, and the estimate should say how it was made.

New work starts its own deductions only once it is finished: nothing is deductible for a period before construction is complete (section 43-30). While the property stands empty for the work, it is taken to be still used to produce income if that use has only temporarily stopped for the construction of an alteration or improvement, or for repairs (section 43-165).

The rules are the same for a house, townhouse, unit or apartment, and in every state; what a renovation takes out differs. Our dwelling pages list the plant a schedule typically counts in each kind of home and what one cost to build, year by year, such as a house in New South Wales, a townhouse in the Australian Capital Territory or a unit in South Australia. The records that matter are the invoices for the new work and the day each part was finished, and for what goes, the day it went, what was received for it and what the demolition cost.

This is general information about the law, not advice on a particular property or a promise of any deduction. What a renovation gives turns on what each part cost, when it was built or bought, how it was depreciated, and who owns it and how, which are matters for the owner and their tax agent.