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TR 97/23 – Repairs and maintenance vs capital improvements

BMT team — Wed, 25 May 2022 06:05:48 +0000

Taxation Ruling TR 97/23, released in December 1997, outlines the tax deductibility of expenses incurred on repairs to premises, plant, machinery, tools and articles. Investment property repairs, maintenance and capital improvements are distinct from each other in the eyes of the Australian Taxation Office, as outlined in TR 97/23. Costs to repair or maintain an investment property can typically be claimed as an immediate tax deduction in the year that the expense was incurred, while capital improvements are not immediately deductible and must be classified as either a capital works deduction or as plant and equipment depreciation. Given that these things are not always clear cut, judgment often needs to be exercised when determining whether something falls under repair, maintenance or capital improvement. This can be difficult, so we provide some simple guidance here. Repair Maintenance Initial repair Capital improvement Answers to common questions Repair Under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 97), repair means ‘the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense).’ For the most part, repair is simply to replace or correct something that has become worn out or dilapidated. It involves restoring to former appearance, form, state or condition without changing character. Works can fairly be described as ‘repairs’ if they are performed to fix: deterioration that has occurred by ordinary wear and tear, or accidental or deliberate damage, or the operation of natural causes (whether expected or unexpected) over time. For example, fixing a crack in plaster would be considered a repair. When determining whether work constitutes repairs, it is important to consider whether the work restores the efficiency of function of the property without changing its character. A minor degree of improvement, addition or alteration can be a repair, however, if substantial, it is not a repair and not deductible under section 25-10 of ITAA 97. According to TR 97/23 ‘renewal, replacement or reconstruction of the entirety (i.e., the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair’. Maintenance According to TR 97/23, if work is in anticipation of, or to prevent, damage or deterioration, it is considered maintenance. Some examples include routine preventative work such as repainting faded walls, maintaining plumbing and deck oiling. Repairs and maintenance often go together, in that repairs will frequently include maintenance work. And some kinds of maintenance work are ‘repairs’ in terms of section 25-10, for example, painting premises to rectify existing deterioration and to prevent further deterioration Initial repair There is also a difference between a ‘repair’ and an ‘initial repair’. While a repair is performed to restore an item, an initial repair is to fix damage which was pre-existing when the property was purchased (whether known to the buyer or otherwise). Initial repairs are of a capital nature, so are not deductible under section 25-10 of ITAA 97. Capital improvement Any works that improve a property beyond its original state are classed as capital improvements. According to TR 97/23, an ‘improvement ‘provides a greater efficiency of function in the property – usually in some existing function. Some indicators that the work performed is an improvement include whether the work will: extend the property’s income-producing ability significantly enhance its saleability or market value, or extend the property’s expected life. A capital improvement will be classified as either a capital works deduction or as plant and equipment depreciation. Capital works deductions Capital works refer to the deductions available for the building’s structure and permanently fixed items. If the property owner is replacing an entire structure that is only partially damaged or is renovating or adding a new structure to the property, it is likely to be capital works. The rate of deduction for capital works is typically 2.5% per year for 40 years from the date of construction. An increased rate of 4% can be used for some property types. Plant and equipment depreciation Plant and equipment assets are items which are mechanical in nature or can be easily removed from the property. If the property owner is installing a brand-new asset such as an appliance, curtains or floor covering, then it is likely to be a depreciating asset. Each asset’s condition, quality and effective life determine the allowances available. Plant and equipment assets can be depreciated using either the diminishing value or prime cost method. Example Let’s consider the example of a rental property that is undergoing a kitchen renovation. Retiling splashbacks and installing a new marble benchtop would be deemed as capital improvements and be claimed as capital works deductions at a rate of 2.5 per cent over 40 years. A new rangehood would be claimed as a plant and equipment asset and be deducted based on the asset’s effective life. If the rangehood was purchased and installed for less than $300 it would be 100 per cent tax deductible in the year the expense was incurred. And if a crack in a cabinet was fixed, it would be considered a repair as a damaged asset is being restored. The expenses involved would then be claimed as an immediate deduction. Answers to common questions How can I tell if the work constitutes a repair, maintenance or capital improvement? It can get complicated when work falls under more than one category. For example, repair work doesn’t stop being a ‘repair’ if it is also maintenance i.e. the work is performed to prevent – or in anticipation of – defects, damage or deterioration. Repairs can also take place at the same time as capital improvements. The best rule of thumb when determining something is a repair, is to consider whether the work restores the efficiency or function of the property without changing its character. As mentioned previously, a minor degree of improvement can still be a repair, but if the change is substantial it is not a repair and therefore not deductible under section […]

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Introducing new public Tax Ruling 2021/3

BMT team — Wed, 25 Aug 2021 06:43:31 +0000

The new financial year welcomed Tax Ruling (TR) 2021/3 to the Australian taxation framework. This new public TR has been in place from 1 July 2021 and relates to the effective life of depreciating assets. Here is what you need to know. What is a public tax ruling and why are they important? Australia’s public tax ruling system allows the Tax Commissioner (the Australian Taxation Office) to introduce binding rules and advice for all Australian taxpayers to follow. Tax rulings are an essential part of the nation’s taxation system and fill the gaps that are left by tax laws in place. Tax rulings can be public or private and TR 2021/3 is an example of a public ruling. This ruling is critical to the depreciation landscape as it is focussed on the effective life of depreciating assets. What does tax ruling 2021/3 relate to? In short, TR 2021/3 addresses the effective life of plant and equipment assets. This particular ruling also introduces rates for assets in the salt harvesting and horse training (racing) industries, which weren’t previously specified. Plant and equipment assets are those that are easily removable or mechanical in nature like furniture, motors and tools. Each plant and equipment asset has a designated effective life set out by this ruling which determines its depreciable rate. New industry in TR 2021/3: Salt harvesting On average, the Australian salt harvesting industry produces approximately 12.2 million tonnes of salt annually, with most of this coming from Western Australia. Previously, there was no allowance for salt harvesting assets in tax rulings, making TR 2021/3 important to the industry. Just some of the assets that have been added in the ‘salt harvesting’ industry class include culverts for conveying seawater/brine/bitterness, tugboats, trucks, port assets and pumps. Assets such as these each have an effective life that’s set to be suitable for the new industry class in TR 2021/3. New industry in TR2021/3: Horse training (racing) The second industry that was introduced in TR 2021/3 was horse training (racing). Many of these assets fell under other categories previously, but some have also been added to appropriately reflect assets and their uses in this industry. For example, a ‘racehorse’ was previously depreciated under sport and recreation services with an effective life of ten years. But with this new industry included, ‘racehorse’ has been split into the different type of trained horses as demonstrated in the table below. Other assets that fall under this category include support assets like horse floats and rugs, portable assets, horse training pools, lead companion ponies and tack room furniture. What does BMT do when a new tax ruling is introduced? BMT have multiple processes in place to guarantee that every BMT Tax Depreciation Schedule is 100 per cent compliant. All changes that are made in a public tax ruling is applied and adopted when preparing a schedule, ensuring that every deduction is captured. To learn more about depreciation and how BMT helps investors claim maximum depreciation deductions while maintaining full compliance, contact the team on 1300 728 726.

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Understanding new tax ruling 2020/3 and how it changes effective life of assets

BMT team — Tue, 11 Aug 2020 23:17:32 +0000

There is no doubting that depreciation is a complicated area of taxation. What makes it even more complex is that the Australian Taxation Office (ATO) releases tax rulings every financial year that affect the effective life of assets and can include additional industries. In this article we will explore: What is an effective life of an asset? What is a tax ruling? Tax ruling 2020/3 overview Under the microscope: TR2020/3 for general practice medical services assets BMT Tax Depreciation is the commercial specialist What is an effective life of an asset? Before we go into details of the latest tax ruling, it’s important to understand what exactly this ruling impacts. One of the categories of depreciation is plant and equipment. These assets are easily removable or mechanical in nature. Some common commercial examples include partitions, air conditioning units, desks and computers. A plant and equipment asset depreciates at a rate based on its effective life. The effective life and depreciation rate can change across industries and how an asset is used. In practice: Depreciation using an effective life Bill owns a restaurant and purchased a new commercial dishwasher for $8,000.The dishwasher has an effective life of 5 years and diminishing value rate of 25 per cent. This results in Bill receiving a first-year depreciation deduction of $2,000 for the dishwasher. Meanwhile, a dishwasher in a residential investment property has an effective of 8 years, but holds the same diminishing value rate of 25 per cent. What is a tax ruling? A tax ruling is an important part of Australia’s taxation framework. Only the tax commissioner (the ATO) can make tax rulings and they can be either a public, private or oral ruling. A recent ruling, named Taxation Ruling 2020/3 (TR 2020/3) was announced at the beginning of this financial year and is a public ruling. This tax ruling replaces the previous year’s ruling (Tax Ruling 2019/5). You can download the full ruling here. Tax ruling 2020/3 overview In effect from 1 July 2020, there are two key areas that this ruling focuses on: 1. Effective life of depreciating assets TR 2020/3 made some changes to the effective life of several assets across industries. Some of the industries that are often included in these tax rulings include manufacturing, retail trade, mining, and much more. 2. Addition of industries It is important that assets are depreciated correctly across commercial industries. For example, you wouldn’t depreciate carpet in a café at the same rate as carpet in a dentist’s office, as cafés experience higher foot traffic. This means that café carpet depreciates in value much faster. The ATO recognises this and has included a number of new, niche categories in TR2020/3 to better suit some industries, including: Aircraft manufacturing and repair services Childcare services Funeral, crematorium and cemetery services General practice medical services Supermarket and grocery stores. BMT’s rate finder tool makes it easy to find out the effective life and depreciation rate of all types of assets across different industries. Rate finder has been updated with all changes from TR 2020/3, click here to start using rate finder today. In practice: Addition of industriesSally is a childcare operator and runs a small centre for children aged between 0 and 5.In the past, Sally was able to claim depreciation on her business assets, but under a different category such as the broad category of ‘education and training’. While the depreciation deductions she received were beneficial, she felt the effective life of assets weren’t fit-for-purpose. For example, her centre’s toys would depreciate much quicker than the same toys in a middle school, but they still had the same effective life. However, TR 2020/3 introduced a new ‘childcare services’ category. This means very specific assets such as toys, tricycles and strollers that Sally’s business holds can now be depreciated to their respective effective lives. Under the microscope: TR2020/3 for general practice medical services assets An interesting category named ‘general practice medical services’ was included as a new addition in TR2020/3. The new general practice medical services is a sub-category under health care and social assistance. Some sub-categories alongside general practice medical services include hospitals, podiatry services and optometry. The assets that have been included in general practice medical services may have been moved from other areas or added with a new effective life. For example, wheelchairs in hospitals hold an effective life of ten years, while wheelchairs in general practice medical services have an effective life of eight years. BMT Tax Depreciation is the commercial specialist BMT Tax Depreciation has been the commercial depreciation specialist for over twenty years. BMT has completed thousands of tax depreciation schedules across all types of commercial industries including manufacturing, agriculture, medical services and hospitality. BMT apply every applicable tax and depreciation ruling to their comprehensive schedules. To learn more, Request a Quote or contact BMT on 1300 728 726.

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When do you pay capital gains tax on investment property?

BMT team — Sun, 20 Oct 2019 22:13:40 +0000

Capital gains tax is an area of taxation that often confuses property investors. The legislation can appear complex, however it’s important for all investors to have a good understanding of it before selling an asset. Capital gains tax is the fee you pay on any profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for. It’s included in your assessable income and taxed at your marginal rate. In this article, we will cover: When do you pay capital gains tax on investment property? How to calculate capital gains tax Capital gains tax methods Capital gains tax exemptions Depreciation and capital gains tax When do you pay capital gains tax on investment property? A capital gains tax (CGT) event occurs when an asset is sold. The timing of this is important as it determines the income year the tax will be applied. For property investors, a CGT event is triggered when you enter into a contract of sale and therefore stop being the owner of the property. The CGT is then applied in the same financial year you sold your property. It’s important to keep thorough records of this process so you can correctly calculate the amount of capital gain or capital loss you make. Property investors are required to keep these records for five years after the CGT event occurs. This is particularly important when you make a capital loss, as the amount can be carried forward as part of unapplied net capital losses. A capital loss does not reduce a taxpayer’s assessable income. Instead, taxpayers are able to offset the loss against a capital gain in the current or future financial years. How to calculate capital gains tax A basic formula for calculating CGT is: Selling price – transaction costs – original purchase price + associated transaction costs = capital gain (or loss) If you have bought and sold an investment property within 12 months, your net capital gain will be added to your taxable income for that year. However, if you have owned an investment property for more than 12 months, there are two methods to calculate your net capital gain – discount and indexation. Depending on eligibility, you can choose whichever method reduces your capital gain the most. Capital gains tax discount method Property investor who have owned an investment property for more than 12 months are entitled to specific concessions when calculating CGT. If you’re an Australian resident and have held the property for more than one year, you’re eligible for a 50 per cent discount on your net capital gain. This reduces your assessable income and therefore the amount of tax you will pay. Capital gains tax Indexation method If you are an Australian resident who purchased an investment property before 21st September 1999, you are eligible to use the indexation method. The indexation method accounts for inflation and therefore calculates your net capital gain based on what your property would be worth in today’s property market. The calculation divides the consumer price index (CPI) at the time you sold your property by the CPI at the time you bought the property. As a result, your initial purchase price is likely to be increased, and your capital gain reduced. Capital gains tax exemptions There are certain circumstances in which CGT can be exempt. CGT exemptions include 50 per cent discount, principal place of residence, six year rule and six month rule. 50 per cent rule: As previously mentioned, property investor who have owned an investment property for more than 12 months are entitled to a 50 per cent discount on CGT. Primary place of residence: This refers to when a person resides, occupies and lives in a property as their home. If a property is considered an owner’s primary place of residence, they are entitled to a full CGT exemption. Six year rule: If a property owner moves out of a primary place of residence and rents it out, they can claim an exemption from CGT for a period of up to six years. If a property owner moves back into the property and afterwards moves out again then a new six year period commences from the time they last moved out. Six month rule: There are exemptions from CGT if a property owner considers more than one property to be a primary place of residence within a six month period. The property owner must meet one of the below conditions: The old property was the owner’s primary residence for a period of at least three months in the twelve months before they sold it An owner did not use the property to provide assessable income in any part of the twelve months prior to selling Depreciation and capital gains tax Capital gain is your profit minus your cost base. Depreciation impacts your cost base and therefore affects CGT. Depreciation deductions can be claimed under two categories – plant and equipment deductions and capital works depreciation. Both can affect your cost base in different ways. To find out more, read Does Depreciation Affect Capital Gains Tax?

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