With the wild weather Australia has suffered of late, it’s no surprise that properties might need some repairs and maintenance in order to keep them in good condition. When it comes to tax and claiming repairs, maintenance and replacement costs, things can get a little tricky. Let’s break it down and see what costs you can claim and how to claim them to maximise your tax refund.
Maintenance vs Capital
There are different types of costs that need to be expensed properly in order to claim. Many people confuse repairs and maintenance with capital costs, but in the eyes of the Australian Taxation Office (ATO), they are two different things.
Repairs
Repairs are any works done to your property in the way of repairing, maintaining or replacing machinery, tools or the premises to produce a business income. Repairing or maintaining means servicing equipment to keep it running in the same condition for which is was purchased. Altering anything to your property to keep or restore an asset to its original condition is considered to be a repair or having maintenance done.
Repairs include:
- painting
- conditioning gutters
- maintaining plumbing
- repairing electrical appliances
- mending leaks
- replacing broken parts of fences or broken glass in windows
- repairing machinery.
Pro Tax Tip: You may not need to own the property to repair an item and claim a tax deduction.
Capital
Capital expenses includes money spent purchasing new assets like plant and equipment. Capital expenses also include permanent repairs or structural alterations done to the existing property for the purpose of increasing value. This includes upgrading before selling or providing upgrades to suit the owners or occupant’s specific needs. If it improves the capital value of the property, then the cost is considered to be capital in nature.
- Capital expenses include:
- substantial improvements to an item or property – for example, installing a new ceiling
repairs made to machinery, tools or property immediately after you purchase or acquire them – this is because the price you paid reflects the item’s condition.
| Are you replacing something that is worn out, damaged or broken as a result of renting out your property? | This is likely to be a REPAIR | Eg replacing part of the fence damaged in a storm or getting in a plumber to fix a leaking tap | This should be claimed as Repair and Maintenance |
| Are you preventing or fixing deterioration of an item that occurred while renting out the property? | This is likely to be MAINTENANCE | Eg getting faded interior walls repainted or having a deck re-oiled | This should be claimed as Repair and Maintenance |
| Are you repairing damage that existed when the property was bought (whether it was known or not) at the time of purchase? | This is likely to be INITIAL REPAIR | Eg fixing floorboards that had damage when the property was bought | This should be claimed as Capital Works or Capital Allowances |
| Are you replacing an entire structure that us only partly damaged? Or are you renovating or adding a new structure to the property? | This is likely to be CAPITAL WORKS | Eg replacing all the fencing, not just the damaged section, or adding a carport | This should be claimed as Capital Works |
| Are you installing a brand new appliance or floor/window covering? | This is likely to be DEPRECIATING ASSET | Eg buying a brand new dishwasher or installing a new carpet | This should be claimed as Capital Allowances |
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Depreciating Assets – What The?
If you’ve incurred a capital expense, it can be claimed as a tax deduction but there are conditions associated with what type of capital improvement it is and how much is claimable. You may even be able to claim the expense in the same year if the item cost under $300. Think bathroom fans, accessories, smoke alarms. If the cost is $300 and over, you’ll need to depreciate the cost as a capital expense over the lifetime of the asset. This means you can claim a portion of the asset each year. For larger items depreciating assets, think carpets, curtains and hot water systems. Depreciating assets will receive higher depreciation rates than capital Works and improvements which will be discussed below. This is because the assets have a shorter life expectancy and will need replacement more often.
Pro Tax Tip: The ATO sets the lifetime of the asset.
There are two parts to depreciating an asset which should be considered and claimed separately:
- The purchase price of the asset
- The costs incurred to bring the asset back to its original condition, such as improvements made to the asset
Capital Works and Improvements
It’s a fact that properties will need capital works done that will improve the value of the property. Capital works are construction improvements made to your building over a 25 to 40 year period with the aim to producing an income.
Think pools, extensions, extra bathrooms or bedrooms, sealing a driveway, new fences and retaining walls and embankments for environmental protection. The good news is as well as improving the value of your property and ability to ask for increased rent, you can claim these costs when it comes to tax deductions.
Not sure how much your capital work will cost or if it’s even worth doing? The clever thing to do is to evaluate your property to see if those costs will pay off. You can claim the costs of getting an estimate from a quantity surveyor or independent qualified person should they be incurred.
Pro Tax Tip: Deduction rates of 2.5% or 4.0% apply, depending on the date on which construction began, the type of capital works, and how they’re used. These rates are much lower than regular depreciating assets as their life expectancy is much higher.
Improvements provide something new to the property, generally furthers the income-producing ability of the property and goes beyond restoring the functionality of the property. Improvements can be either capital works where it is a structural improvement or capital allowance where the item is a depreciable asset.
How To Claim
Correctly categorising each expense will maximise your tax deductions. It’s important to include all of the income you receive. This may come from short term rental arrangements, sharing part of your home and other rental-related income such as insurance payouts and rental bond money you retain.
You’ll only be eligible to claim expenses incurred if they’re categorised correctly. You can only claim expenses for the period your property was rented or if you were actively trying to rent your property. Some expenses can only be expensed over a set number of years.
Keep all your records to prove your costs – both income and expenses as well as purchase and sale records. If you can’t prove your claim, then you can’t claim.
Pro Tax Tip: You can’t claim a deduction for your own labour Every property is different and all costs that can be claimed will be different too. ITP Tax Accountants will ask a series of questions to ensure you’re claiming every expense available – even ones you might not know about! Phone 1800 367 487 and chat with a friendly professional today.