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.
Key points:
|
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.
Hey BMT,
We bought a home last March 2021with the intention of it being our family home. We couldn’t get the tenants out so had to honour their lease which ended in October 2021 and then we moved in.
They left the place trashed so we had to do lots of rubbish removal, maintenance and repairs.
I’m so confused – Would this be initial repair or a tax deduction? Seems silly to keep reporting capital every year for our PPR. Please help!
Katrina
Hi Katrina,
Thanks for your comment.
While you no longer rent the property, you may still be able to claim repair expenses where the need for repairs relates to a period where the property was income producing, which would be the case here. However, you will need to be mindful of any items replaced that would be deemed an improvement and so depreciable and not a repair.
Thanks,
The BMT Team.
Hi I have an investment property where the front veranda concrete has totally cracked and needs removing and replacing in parts. Can the costs be claimed as immediate tax deduction under repair and maintenance or is this a capital improvement?
We have a rental property and the neighbour would like to replace the entire dividing/ boundary fence.
The current fence has a section that has fallen down and the rest of the fence is although rusting is still standing.
Is the entire fence classified as a repair or only the section that has fallen.
The neighbour also wishes for the portion of the fence that is still standing to increase in height, as the current fence doesn’t provide and privacy or security at a meter in height.
We would appreciate your advise,
Thank you.
Hi Alice,
Thanks for your comment.
A repair is work done to fix damage on an existing asset. Maintenance is work completed to prevent damage or deterioration of an asset. Both repairs and maintenance costs can be claimed immediately as a deduction.
If an asset has been completely replaced it would typically be depreciable and claimed over the effective life of the asset (in a residential property, fencing is a capital works asset and claimed over 40 years).
If only the damaged part of the fence is replaced, then this would likely be considered a repair and the full cost claimable in the year incurred.
An improvement is anything that improves the asset beyond its original condition and must be depreciated. If the entire fence is to be replaced with a higher fence, it would be considered an improvement eligible for depreciation.
Thanks,
The BMT Team
Hi BMT,
I have an investment property that I rent and I need to have 4 sections of the sewerage pipe replaced (all approx 580mm in the ground). How is this work categorised for tax purposes and how much of the work can be claimed on tax?
Hi Kyle,
Thanks for your comment.
The replaced pipes will fall under a repair or maintenance category as you are restoring a damaged asset and preventing further damage, entitling you to claim an immediate deduction.
You can keep the receipts for this work, take it to your accountant and claim it in your return the financial year the cost is incurred.
Thanks,
The BMT Team
hi BMT
i have a deck which was installed in 2012 when i bought my property. the joists and decking boards on this deck have wood rot and was a safety hazard for my tenants. i have had to remove some of the joists and replace them where needed. and replaced 75% of the decking with the same as used before. which category would this fall into
thanks
Jono
Hi Jono,
Thanks for your comment.
The replaced deck will fall under repairs as you are restoring a damaged asset, entitling you to claim an immediate deduction.
You can keep the receipts for this work, take it to your accountant and claim it in your return the financial year the cost was incurred.
Thanks,
The BMT Team