One of the most common mistakes made by property investors when completing their annual tax return is confusing repairs, maintenance and improvements.
In this article, we will cover:
It’s important to understand and distinguish each deduction in order to correctly lodge your claim and maximise your tax refund.
What is a capital improvement?
A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction or as plant and equipment depreciation.
Capital works refers to the deductions available for the building’s structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings.
Repairs vs maintenance for rental property
According to the Australian Taxation Office (ATO), repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence.
Maintenance is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion.
Any costs incurred to repair or maintain your investment property can typically be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are used to work out your capital gain or capital loss when you sell the property.
Repairs, maintenance and capital improvement examples
Let’s take a look at an example of when you might need to distinguish between repairs, maintenance and capital improvements. You might decide to renovate the bathroom in your investment property:
Retiling the bathroom would be deemed as a capital improvement and can be claimed as a capital works deduction. Residential homes in which construction commenced after 15 September 1987 are eligible to claim capital works deductions at a rate of 2.5 per cent over 40 years.
If you decide to replace a light fitting in the bathroom, this will be claimed as a plant and equipment asset and can be deducted based on the asset’s effective life. If the purchase was less than $300 it will be 100 per cent tax deductible in the year the expense was incurred.
If you fix a crack in the plaster, this will be considered a repair as you are restoring a damaged asset. You’re entitled to claim an immediate deduction for any expenses involved.
Property investors completing renovations should also be aware of legislation introduced in 2017. The legislation stipulates that investors who purchased property after 7.30pm on 9 May 2017 are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. But these investors can still claim depreciation on new plant and equipment assets added to a property.
However, if an investor lives in their rental property while renovating, any newly installed assets could be classed as previously used. Therefore, the investor is potentially risking their tax benefits so it’s important not to live in an investment property while renovating..
Claim your depreciation deductions correctly
If you added anything to your property in the last 12 months, you can simply log into the MyBMT portal to add new assets to your schedule, or you can contact BMT’s team on 1300 728 726. The best way to ensure you claim property improvements correctly is to contact a specialist quantity surveyor to arrange a tax depreciation schedule update.