Deductions for repairs, maintenance and improvements are areas the Australian Taxation Office pay particular attention to on annual tax returns. For this reason, it is important that investors understand the difference.
Repairs are considered work completed to fix damage or deterioration of a property, for example replacing part of an existing roof that is leaking, broken window or damaged fence.
Maintenance is considered work completed to prevent deterioration to a property, for example, removal of fallen debris in gutters from neighbouring trees, oiling an external deck to prevent cracking from the sun or washing the house to remove sea salt resulting from the nearby ocean winds.
It is important to be aware that the Australia Tax Office requires “the expense directly relates to wear and tear or other damage that occurred as a result of renting out property, and the property
- continues to be rented on an ongoing basis
- remains available for rent but there is a short period when the property is unoccupied – for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.”
Source: Australian Tax Office
Claiming Expenses Against Rental Property Revenue
Any costs incurred to repair or maintain a rental property can be claimed as an immediate 100 per cent deduction in the financial year of the expense. It is a legal requirement that you keep receipts of the repair or maintenance being carried out if you are paying directly for this or your property manager includes the expense on the rental income and expense statements. These will be required to be sent to your accountant who prepares the tax return so they can validate and verify the expense can be legally claimed.
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 and depreciated over time or as plant and equipment depreciation. An example of a capital works deductions could be replacing a substantial kitchen or bathroom renovation, or building a new garage. If any plant and equipment items are removed and replaced, for example an air conditioner, this will also be considered a capital improvement.
The rate of deduction for these expenses is generally 2.5% per year for 40 years following construction.
For a comprehensive overview of repairs and maintenance and capital expenditure that can be depreciated, please download this guide from the Australia Tax Office.
Obtaining a Property Depreciation Schedule
A depreciation schedule is a report that outlines all available tax depreciation deductions for an investment property or commercial building. A depreciation schedule shows the deductions for the depreciation of the building structure and the items within. To discover what can be legally claimed for any investment property you own, you can engage a property depreciation expert. They will physically inspect the property, noting the plant and equipment, and provide a written report with the amount of depreciation that can be claimed over the useful life. This report should be provided to your accountant who can claim the legal depreciation amount as part of your annual income tax return.