Recognising the Difference between Repairs & Improvements for Investment Property Owners
When investors make claims for deductions in their tax returns it is important to know that the Australian Taxation Office (ATO) will differentiate between a REPAIR and an IMPROVEMENT. This is important to know the difference as it could save you thousands of dollars at tax time.
So what is classed as a repair and what is classed as an improvement?
A Deductable Repair is when one returns an item or property to its original state, it is an exercise in retaining the value of the item or property. An Improvement is when one improves the condition of an item or property beyond that of when it was purchased.
What is the difference when I go and claim it on tax?
A repair will attract an immediate 100% deduction in the year of the expense. An improvement is capital in nature and as such is depreciated over time.
What tests can I use to determine if it is a repair or an improvement? – Three tests
- Has the condition of the property been improved beyond the original condition at the time of purchase? When the item was partially or fully replaced, was this done due to the item being damaged, or was it done to improve what was previously there?
- Has the property been established as an income producing property? If you are claiming a repair on your tax, the ATO states that the repair must relate directly to wear and tear or other damage that occurred as a result of renting out the property.
- Was the asset partially replaced, or replaced in its entirety? Partially replacing an item such as a fence panel, due to damage or wear and tear would imply that a repair has been carried out. However, if a fence panel needs to be replaced but the investment property owner decides to replace the entire fence (for no apparent reason except to improve the property value), then this would be classified as an improvement.
Some important tips;
- When completing repairs make sure they are carried out when the property is tenanted. The ATO will allow repairs as a deduction only if the property is being used for income producing purposes at that time. However if a tenant has recently moved out of the property and the repairs are required due to damage caused by those tenants then the repairs will be deductable as the damage occurred during the time the property was income producing.
- It is important to consult an accountant when you make a repair claim, their fee is also 100% deductable.
- An initial improvement at the time of purchase will not give rise to an immediate tax deduction. There may be ways to claim the initial improvement, however this would be through depreciation over time. It will not create an immediate deduction in its own right.
So how do I claim tax benefits for Improvements that I carry out on my investment property?
You need to consult with a Quantity Surveyor, it is best to consult your quantity surveyor before making improvements and also after your improvements have been completed.
The purpose of engaging a quantity surveyor prior to making improvements is because they have the ability to produce a complex report which can determine if the old structure can be ‘scrapped’ where the written down value of the item can be written off as a 100% tax deduction at the time it is disposed.
If you engage a quantity surveyor after you have made your improvements they will be able to produce a depreciation schedule for you to claim the maximum amount of depreciation from your improvements and your asset.
Information for the above article was taken from;
Beer, Bradley, “Value add to your knowledge. Repairs and improvements – Recognising the difference for investment property owners.”, The Property Management Journal. Spring 2009: 31-32.
Posted: Thursday, 5th November 2009 at 11:53 am
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