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.
i bought a rental property and having potential tenants came they commented the carpet smell and deteriotated (40 years old) so we decided to replaced it with the new one, but on the process found the underlay has sticked to the floorboard. hence cheaper solution was to sand and polish the floorboard which we took. can i claim the cost of labour to dispose the carper and underlay and the carpet spike? also the swimming pool apparently need some update to meet new tenancy law for safety and some repair, which cost more than turning it back to a backyard, which we did. can i depreciate the cost turning the pool to lawn?
Hi Irwan,
Thanks for your comment.
If you had people come in and remove the carpet for you there will be opportunity to claim this expense though discuss with your accountant if you had yet to derive income. However, the floorboards themselves are not eligible to be depreciated as they’re over forty years old.
You can’t claim the lawn itself as this is considered ‘soft’ landscaping, but you can claim the costs associated with removing and filling the pool in under capital works which will be depreciated over forty years.
Thanks,
The BMT Team.
Seeking some quick clarification… We have replaced an entire roof damaged through storm. The insurance payout covered cost of replacement exactly. Can we now depreciate the cost of the replacement of the roof over the life of the property?
Hi Michael,
Thanks for your comment.
Because the insurance covered the cost of the roof replacement you are not eligible to claim under depreciation. However, you can claim the cost of your insurance fees as an expense.
Thanks,
The BMT Team.
I may need to move into my investment property as a PPOR soon. If I paint walls and replace carpets before moving in (after tennants have left) can I claim any of this? I previously lived in the home when it was brand new and it has been rented for over 10 years now and looking worse for wear.
Also with immediate deductions, can you claim multiple items under $300 each per financial year??
Thank you
Hi Lisa,
Thanks for your comment.
If the carpet or paint needs replacing you may still be able to claim repair expenses where the need for repairs relates to a period where the property was income producing.
However, you will need to be mindful of any items replaced that would be deemed an improvement and so depreciable and not a repair, like higher quality stain resistant carpet, feature walls, textured paint.
Yes, you can claim multiple items under $300 each year as an immediate write-off.
Thanks,
The BMT Team.
Hi! We have used your services prior, at the moment we are not sure whether paying a painter to repaint the entire interior of a rental property is an immediate deduction, or a depreciable item please? (It was standard white paint, just functional)
Much appreciated!!!!
Hi Andrew,
Thanks for your comment.
If the paint had faded during the rental period and now painted to the same standard and colour it would be possible to claim as a deduction for maintenance.
If you added feature wall colours, modern paint textures or similar it would be seen as an improvement and claimed as depreciation under capital works.
For more on repairs, maintenance and capital improvements read here: https://www.bmtqs.com.au/bmt-insider/taxation-ruling-97-23/
Thanks,
The BMT Team.
First and foremost – love the idea of this basic Q&A!
Hopefully an easy one as an example, I need to replace fly screens that have been lost/stolen from an investment rental. If I had to purchase a couple of tools (on top of material) to complete the works, can those tools be claimed i.e. Hacksaw etc.?
Cheers!
Hi John
Thanks for your comment.
Only if they are solely used for the investment property with no further personal use, which can be hard to prove with the ATO strict on these areas.
If you are ‘in the business of’ renting properties, further tax deductions may apply. Read our recent Maverick article for more information:
https://www.bmtqs.com.au/maverick/mav-50-the-business-of-owning-and-renting-multiple-investment-properties
We always recommend speaking to your accountant on all tax matters.
Thanks,
The BMT Team.