We explain Repairs, Maintenance & Improvements for Rental Properties

We explain Repairs, Maintenance & Improvements for Rental Properties

The minute differences between what is a repair or maintenance or an improvement along with the completely different treatment of each of these means that this is one of the most confusing areas of tax law for rental property owners. It also means that it is an area of high audit risk that the ATO is continually targeting. At Grow Accounting we believe in educating our clients to broaden their knowledge and keep on the good side of the ATO!

The Definitions are:

Repairs are to make good or remedy defects in, damage to or deterioration of the property.

Can usually claim an immediate deduction

Maintenance is to prevent deterioration or fix existing deterioration.

Can usually claim an immediate deduction

Improvement’s mean work that:

  • provides something new
  • generally furthers the income-producing ability or expected life of the property
  • generally changes the character of the item you have improved
  • goes beyond just restoring the efficient functioning of the property.

Usually these expenses need to be depreciated over a number of years – when Grow Accounting prepares your tax return we use the rates prescribed by the ATO.

In relation to repairs the timing of the repair also plays a fairly large part & can mean different treatments at different times:

  • REPAIRS completed before a property is being rented are incurred before income is earnt & will be classified as capital and therefore depreciable not deductible
  • REPAIRS completed while a property is being rented are deductible provided they can be attributed to fair wear and tear otherwise they can be classified as capital and therefore depreciable not deductible
  • REPAIRS completed AFTER a property is being rented are deductible provided they can be attributed to fair wear and tear during the tenancy otherwise they can be classified as capital and not deductible until property sold.

To further complicate things there are also some further rules in relation to these kinds of expenses:

  • If you replace something clearly identifiable & separable even if broken – e.g replacing the whole stove if 3 hotplates are broken or replacing the set of kitchen cupboards instead of just the broken ones it is likely to be an improvement & will need to be depreciated over a number of years.
  • If you used a different material to what was previously used – e.g. replace wooden cladding with plastic cladding it is likely to be an improvement & will need to be depreciated over a number of years.

Grow Accountings Tip: Make sure you get detailed invoices especially if work has several components for e.g. electrician comes in to fix air conditioner but also installs new light fittings. The portion of the bill for air-conditioning will be deductible (if property rented for a while) but the installing of brand new light fittings will be added to the cost of the lights & depreciated over a number of years.

If you are thinking of doing any renovations or repairs to your property please give Grow Accounting a call first so you understand how or more importantly if this will affect your tax return.

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