One of the most common mistakes made by property investors when completing their annual tax
return is confusing repairs, maintenance and improvements.
It’s important to understand and distinguish each deduction in order to correctly lodge your claim
and maximise your tax refund.
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. This occurs
when an asset is already damaged or deteriorated and therefore requires repairing.
Maintenance, on the other hand, 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 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.
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.
Knowing the difference between repairs, maintenance and capital improvement deductions is
particularly important when renovating.
For example, you might decide to renovate the bathroom in your rental 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 15th September 1987 are
eligible to claim capital works deductions at a rate of 2.5 per cent over forty 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 the 9th of May
2017 are unable to claim deductions for the decline in value of previously used plant and equipment
found in second-hand residential properties. If an investor lives in their rental property while
renovating, any newly installed assets will be classed as previously used. Therefore, the investor is
potentially risking their tax benefits.
If a property is considered to have been substantially renovated by the previous owner for selling
purposes, then an investor can claim depreciation on the new plant and equipment assets along
with any new or old qualifying capital works deductions available.
Given the complexities, investors considering renovations should contact a specialist quantity
surveyor for advice before completing any work.
To discover what can be claimed for your investment property, simply Request a Quote at
bmtqs.com.au/apply-online or speak with the expert team at BMT on 1300 728 726.
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.
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