What is Considered Repairs & Maintenance and What’s Capital Improvements
When can you claim an expense as repairs and maintenance and when do you have to claim it as capital improvements
Find out here
The ATO allows property investors to claim expenses incurred on their property as a tax deduction under TR 97/23.
But how you claim them can vary greatly between what you spent your money on… and why
You can claim a new paint job at either 100% instant asset write-off or claim the same paint job at just 2.5% pa for the next 40-years.
It all Depends on why you re-painted your investment property.
Let me explain
When you do work to your property it falls into one of five categories
- Initial Repairs
Capital Improvements (broken down into…)
- Plant and Equipment (division 40)
- Capital Works (division 43)
Initial repairs are the things you have to fix when you first purchase your investment property (or need to fix when converting your Principal Place of Residence into an investment property).
Initial repairs are considered by the ATO as capital in nature. So, they’re not deductible under section 25-10 of ITAA 97 – but can be claimed as capital improvements under division 40 for plant and equipment and division 43 for capital works.
An example would be:
Say you convert your home into an investment property and the real estate agent says you need to fix the leaking roof, broken fence and replace the oven before tenants can move in.
Well all three would be considered initial repairs and not claimable at 100% write-off.
But… you can claim the oven in the Division 40 deductions at 16.66% pa (if the supplied and fully installed cost was great then $1,000) or claimed at 37.5% pa if the supplied and fully installed cost was under $1,000
Plus… you can claim the roof and fence repairs under division 43 at 2.5% pa.
Tip: ideally you won’t have any initial repairs to carry out.
If you can delay any such initial repairs until the tenants have been living in place for 4+ months these items are no longer considered ‘initial’ and move into the repairs and/or maintenance categories at a much more favourable deduction rate.
Repairs: ‘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).’ section 25-10 of the Income Tax Assessment Act 1997 (ITAA 97)
Repairs can be identified and claimed at 100% if they are “performed to fix deterioration that has occurred by ordinary wear and tear, accidental or deliberate damage, or
the operation of natural causes (whether expected or unexpected) over time.” ATO
However, going beyond a repair and enhancing/improving the assets or property with additional works will disqualify you for the repairs deductions
Replacing a portion of your roof due to cracked tiles is considered a repair under ATO legislation.
But… should you replace the entire roof, the same ATO legislation deems this “the whole or substantially the whole” and knocks your expense out of the more favourable repairs category (100% write-off) and into the Capital Works category. Claimable at 2.5% pa.
Security Screen Repairs Deductions
Security screens are a Capital works item (division 43), so typically screens and doors are claimed at 2.5% per annum.
However, repairs carried out on them can fall under the repairs and maintenance deductions category. These are claimable at 100% instant write off.
My own property has ProwlerProof screens and doors installed. But recently the screen door closer failed, requiring a replacement.
I got one from Bunnings, and it was the exact replacement model.
It cost me $49 and I installed it myself.
I could claim this as a 100% tax write off as it was a repairs and maintenance item.
If I’d paid for a handyman to carry out the work I would have been able to claim his fee 100% as well.
Under ATO Tax Ruling TR 97/23 maintenance deductions occur when you have to carry out works “in anticipation of, or to prevent damage or deterioration”.
A great example:
Termite barrier poison reapplication.
When you have the perimeter of your house slab drilled and filled with poison to prevent termites the initial drilling and filling is a Capital Works item claimed at 2.5%pa. As it is an improvement to the property.
However; each time you reapply the poison down the holes this is considered maintenance and claimable at 100% write-off.
It is similar for timber decking.
The installation of a timber deck is considered a Capital Works item while the ongoing oiling of the deck each summer is a maintenance item.
Further: Should you need to replace a few timbers here and there these are considered repairs. Also claimable at 100% write off.
When your property expenses don’t qualify as repairs or maintenance items they will most probably qualify as Capital Improvements.
The differences between Capital Improvements can be found here but for now, here’s a quick breakdown for you;
- Capital Works Deductions (Division 43)
This is where items such as painting, new kitchens, new fencing, new roofs and so on are collated and depreciated at 2.5% pa
- Plant & Equipment Deductions (Division 40)
An all Inclusive ‘Super’ Example
Lets say you buy a 20 year old property on the Gold Coast as a rental investment property.
The house has a pool and pool cabana-gazebo thingy in need of some attention.
When the property contract settles you send in a builder who replaces the roof on the cabana.
You also install a brand new BBQ for tenants to use while in the pool yard.
Two months later as part of a routine check the builder replaces one of the timber posts holding up the roof. After 3-years of renting out the property the property manager calls you to tell you the BBQ has broken and needs replacing. Which you do
Here’s how that all breaks down in deductions
- The roof replacement is considered an initial repair and claimed at 2.5% pa in the Capital Works schedule
- The replacement of the rotting timber post is considered a repair and claimed as such at 100% write-off
- The purchase of the new BBQ was a capital improvement and because it cost $990 fully installed it was depreciated at 18.75% pa in the first financial year. The 37.5% pa each year thereafter.
- Plus… when you scrapped the broken BBQ you claimed the residual value as a lump sum 100% tax deduction
- The replacement BBQ you purchased cost $1,100 fully installed. But because it was a repairs & maintenance issue (replacing the broken one) you can claim the brand new one as a 100% instant asset write-off as well.
Knowing exactly how and why to claim improvements made to your property can be tricky and confusing.
Yet, my team an I at WRC Quantity Surveying will always be able to point you in the right direction and ensure your tax deductions are fully maximised to be the most tax advantageous they can be
To find out more or to get your free quote, simply get in touch with us here and we will get back to you within 24-hrs (usually within 2-hrs)
Want to see some real world results
The best place to see what other investors are getting in tax depreciation deductions for properties similar to yours is by visiting our client portfolio page here
For further reading on more of our quantity surveyor articles click here
Or to visit our home page for Brisbane tax depreciation services click here