As with anything taxation, things are never as simple as they seem – or, more relevantly, as simple as we would like them to be. This article could go for untold pages. The ATO Ruling on this topic, amongst many other writings, is TR97/23, and is 25 pages long.
- Tags: Landlords, Property Investment, Tax
This article is not meant in any way to be exhaustive or to cover all aspects of the subject. It has been simplified to give an overview should be construed as general advice only - you should consult us or another professional for an evaluation of your own unique circumstances.
The courts and Tribunals are littered with various decisions in relation to the topic of claiming tax back on repairs and improvements to your ohme, and sometimes it is hard to understand how the decision was arrived at.
Repairs are tax deductible while improvements are subject to capital works deduction at the rate of 2.5% of the cost per annum.
There are a number of words and phrases that the ATO discusses in the ruling that are important in helping to make a decision as to whether it is a repair or an improvement. Some of the terms are:
Efficiency of function
To start with, what is a repair?
A repair is:
Examples: painting, holes in walls, broken window, rusted roof, part of a fence.
- Remedying or making good defects, damage to or deterioration of property;
- Restores efficiency of function: and
- Brings the property back to the state or condition in which it was acquired
The use of different materials does not necessarily preclude it from being a repair. It depends on how much it improves the efficiency of function. For example, replacement of a damaged asbestos roof with a tin roof would qualify as a repair as asbestos roofing is no longer available.
Expenditure on free standing or depreciable items such as stoves and hot water systems are not repairs. They are depreciated over their useful lives.
This is probably the area where people have the most misconceptions, or are misinformed and is a popular area of review by the ATO.
Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition of the property are capital by nature.
Examples: replace broken doors or windows, repair fence, repainting the house
replace the tin roof with tiled roof
- Improves the efficiency of function.
replace a timber wall with brick wall
replace a wooden fence with a brick fence
Examples: new kitchen, replace entire fence, full bathroom renovation.
- Replacement of something in it entirety
If something is replaced in its entirety it is an improvement and not immediately tax deductible.
This can be a confusing area. Replacement of an entire roof is not the replacement of an entirety because the roof is a subsidiary part of the house. However, replacing a kitchen or fully renovating a bathroom is considered to be the replacement of an entirety. You should consult your tax advisor if you are unsure.
Efficiency of Function
Where the work done takes an item beyond what is was originally and will improve the efficiency of function.
Example: replacing wooden stumps with concrete stumps.
Where it brings it back to the same efficiencyof function, it is claimable as a repair.
If something is restored over a period of time it can possibly be considered that it is a series of repairs. For example, replacing sections of fence over a period of time until it is fully restored
may give rise to a deduction for each restoration.
Work ordered to be done by regulatory bodies is deductible only if it involves remedying of defects, damage or deterioration and it doesn't improve the efficiency of function.
Work done to control health risks from dangerous substances is not deductible as a repair. It may be deductible under subsection 82BK(1) as allowable environmental protection expenditure. The example the ATO gives in the ruling involves removal of asbestos insulation material from a building. On this basis it would seem that replacing an asbestos roof would qualify under this section.
The deductibility of expenditure on rental properties is a complex area and there is much misinformation out there. It is strongly recommended that you consult your tax advisor before you incur the expenditure.
How to claim tax on property renovations
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