Repairs and maintenance or capital improvements?
Property Managers can assist owners to make the correct claims
“Our hot water system isn’t working and it needs repairing.” It’s just one of the regular phone calls every Property Manager receives. Property Managers can help to address any concerns the owner has by encouraging them to claim back these costs when they complete their annual tax return. Before a landlord starts tallying deductions, a property manager can explain the difference between the types of deductions available. The Australian Taxation Office (ATO) provides legislation which has implications on the way deductions are claimed based on whether a claim is for a repair, maintenance, or a capital improvement. Note: Property Managers are not tax professionals, always seek your own independent advice, call your accountant, refer to the ATO website and seek the services of a professional Quantity Surveyor. We, at Paramount Private Property Management work closely with several companies, including BMT Tax Depreciation. We can organise your Depreciation Schedule to be carried out and sent to you or direct to your accountant.
Repairs and maintenance
Repairs can be defined as work completed to fix damage or deterioration of a property.
Some examples of repairs include:
1. Fixing part of a damaged fence.
2. Replacing part of the guttering or windows damaged in a storm.
Work completed to prevent deterioration to a property is defined as maintenance.
Some examples of maintenance include:
1. Painting a rental property.
2. Oiling, brushing or cleaning something in the property that is otherwise in good working condition, for example oiling a wooden deck.
3. Plumbing maintenance.
4. Servicing an air conditioner.
A deduction for expenses incurred because of repairs or maintenance on an investment property can be claimed completely within the current financial year.
Improving the condition or value of an item or structure beyond its original state at the time of purchase is defined as capital improvements. The ATO allows investment property owners to claim capital improvements as either a capital works deduction ora depreciation deduction for the improvement of plant and equipment items. These deductions are claimed over a period of time depending on the assets’ effective life. Capital works deductions include structural additions and renovations such as adding and extending an internal wall and also includes items fixed to the property which cannot easily be removed. Depreciating plant and equipment items include removable or mechanical items such as carpet, hot water systems, stoves, lights and light fittings.
Questions to determine the type of claim
Property Managers can help property investors to determine how the expenses of an investment property should be claimed by asking the following questions:
1. Has the property or item been improved beyond its original condition at the time of purchase?
If an item provides something new or it changes the character of the original item in any way, it will be considered a capital improvement.
2. Was the asset partially replaced, or replaced entirely?
Partially replacing an item due to damage or wear and tear is classified as repairs. If an owner merely does work to extend the life of an item or keep it from deteriorating, this work is classified as repairs. If the owner decides to replace the item entirely to improve the property’s value, it will be considered a capital improvement.
Consult with a Specialist Quantity Surveyor
We can assist our investor clients with any queries they have regarding claims for alterations, additions, repairs or improvements made to a property and the implications these changes may have on depreciation by encouraging them to contact a Quantity Surveyor with expertise in tax depreciation. Quantity Surveyors are recognised by the ATO as one of the few professionals with the appropriate construction costing skills to calculate depreciation deductions. A Quantity Surveyor can provide the investors’ Accountant with a tax depreciation schedule. This schedule will outline all capital works deductions and plant and equipment items considered to be capital improvements. A tax depreciation schedule will also outline all available deductions for the life time of the property (40 years) which the owner can claim when completing their annual taxation return. Property investors who are considering completing a renovation on their property should also request a Quantity Surveyor to complete both a pre and post renovation depreciation schedule, as any removed items may be entitled to be written off as an immediate deduction for the owner.