02 Sep Capital or Repairs & Maintenance?
Another question from the common questions file.
Our short answer is:
Repairs and Maintenance are generally defined as a cost that repairs or replaces an existing item. That means if you replace an appliance with another comparable appliance then it will generally be Repairs & Maintenance, even if it costs over $300.
BUT, if you are replacing that old stove with a new model that has extra features then it will be a capital improvement and you will have to depreciate it over its useful life.
What Does This Mean and Why is it Important?
It is important to understand the difference between repairs and capital costs because repairs are immediately tax deductible whereas the cost of capital improvements can only be deducted over the life of the asset. In short, you will get a bigger immediate tax benefit from repairs and maintenance.
Here is an example:
The old faithful double wall oven in your rental has finally given up the ghost and you decide to replace it with this new Westinghouse oven.
It is certainly more modern than your old oven and has some new energy saving features but it is basically the same as the one you replaced. The replacement will be a like for like replacement and the total cost of the new oven will be fully deductible. That cost includes the cost of removing the old oven and installation of this one so on a purchase cost of $2,400 you may have an immediate deduction of $3,000 or more.
Assuming a marginal tax rate of 32.5%, your immediate tax benefit from the repairs & maintenance deduction will be around $975.
If the oven you are replacing is an old single wall oven then replacing it with this model will be an improvement and the cost of the oven (including disposal and installation costs) will be a capital cost and must be depreciated over its useful life.
In this case your immediate tax benefit from the replacement will only be around $240.
Like most things related to tax it is not always that simple though. There are exceptions to this general rule for things like initial repairs to bring a property up to standard, renovations, and some Body Corp charges which will all be capital costs and cannot be deducted in full immediately.
Record Keeping is Important
You can be audited up to 4 years after your tax return is assessed and the ATO can always form a view the oven was not a like for like replacement. Remember with tax law it is almost always a case of guilty until proven innocent so the onus will be on you to prove it was a like for like replacement. If you are audited your records will be important and things like pictures of the old oven, brochures and specifications, and of course your invoices will all go a long way to convince the ATO you should receive the benefit of the repairs & maintenance claim. Electronic records are acceptable to the ATO so scan and keep everything to give yourself the biggest chance to maximise the tax benefit from your rental.
For more information you can CLICK HERE to see what the ATO have to say. We don’t always agree with the ATO and remember this video represents the ATO’s view only. If you want advice that works better for you then CLICK HERE to contact us before you make your decision.