Australian property investors are increasingly undertaking both substantial and cosmetic renovations to increase property values. Renovations were up 11 per cent this year according to Master Builders Australia, with chief economist Shane Garrett stating, “Australia’s home renovations sector enjoyed its busiest quarter in 14 years during the three months to September 2018”.
Let’s look at the difference between a substantial renovation and a cosmetic renovation and the tax implications for owners of investment properties.
In this article we will answer:
- What is a substantial renovation?
- What is a cosmetic renovation?
- What are the rules affecting second-hand property owners?
What is a substantial renovation?
According to the Australian Taxation Office (ATO), substantial renovations occur where ‘all, or substantially all, of a building is removed or is replaced’. This includes removing or replacing ‘foundations, external walls, interior supporting walls, floors, roof or staircases’. When combined, these would directly affect most rooms within a property.
If you’re undertaking any structural work that requires building approval, or moving doors and walls, the renovations would likely be categorised as structural in nature.
If a property was substantially renovated by previous owners prior to selling and renovations remained unused, property investors can claim depreciation on the new plant and equipment assets installed by the previous owner, as well as any newly installed or qualifying capital works deductions available.
With substantial renovations, the following applies:
- Investors who do not live in the property during renovations can claim on work they complete themselves
- Investors can claim on capital works renovations
- Investors can claim on existing plant and equipment installed by the previous owner
- Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing
What is a cosmetic renovation?
Cosmetic renovations are generally visual in nature and more cost effective than their structural counterparts. Examples of cosmetic renovations can include painting, patching up minor wall cracks, adding new carpet, replacing hardware like door handles, adding a letterbox to the front of a house or changing light fittings.
Undertaking a cosmetic renovation is a good way to improve a property without incurring the expense of undertaking a substantial renovation, but it’s important to understand the differences and know what you can claim.
With cosmetic renovations, the following applies:
- Investors who do not live in the property during renovations can claim on work they complete themselves
- Investors can claim on capital works renovations
- Investors can’t claim on existing plant and equipment installed by the previous owner
- Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing
What are the rules affecting second-hand property owners?
Following depreciation legislation changes in 2017, restrictions have affected the ability of property investors to claim tax depreciation deductions on previously used plant and equipment assets.
Second-hand residential properties purchased after 7:30pm on the 9th May 2017 are not able to claim depreciation deductions for existing plant and equipment assets as they are deemed by the ATO to have been ‘previously used’. There are some exceptions to this rule which include:
- Commercial properties which are unaffected
- New properties which have never been lived in
- Properties where contracts exchanged before 9 May 2017 and haven’t been lived in by the owner after 30 June 2017
- Substantially renovated properties
Most properties have had some work completed that a current owner can claim. It’s always worth contacting a specialist Quantity Surveyor to find out how much you’re entitled to.
A BMT Tax Depreciation Schedule outlines all the deductions you can claim for your property. The schedule lasts for forty years and the fee is 100 per cent tax deductible.
In the FY 2018-19, BMT found our clients an average of almost $9,000 in first-year tax deductions for all residential properties. For those with properties directly affected by the 2017 legislation changes, we still found an average of $5,641 in deductions per year.
There are benefits in undertaking both substantial renovations and cosmetic renovations. Often the two will complement each other and add to the overall improvement of your property. Knowing what you can claim will ensure that you obtain the maximum depreciation deductions from your investment property.
BMT staff can assist you in reviewing your current circumstances and provide a tax depreciation schedule that includes a forecast of eligible depreciation claims. For a free assessment of your property, speak with one of our expert team on 1300 728 726 or Request a Quote online.
To learn more, read Are home renovations tax deductible?