The difference between repairs and improvements and what you can claim on your rental property.
Building wealth through owning property is a very common strategy to create long term wealth.
According to the ATO there are nearly 2 million individuals that own an investment property; that’s a significant number of people!
While the ATO produces an excellent guide for rental properties (you can download a copy of the 2019 guide here https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Rental-properties-2019.pdf), I receive a lot of questions about whether work done on a rental property is considered ‘repairs’ – and can be claimed as such – or, ‘an improvement’. The following is a summary of the types of costs incurred and how they are claimed for taxation.
The difference between a ‘repair’ and a ‘renovation’ can be a grey area but the ATO has provided a lot of guidance on this matter and there have been a number of cases on which we can base our decisions.
Repair vs Improvement
The ATO provides a definition for each as:
Repair: the work restores the efficiency of function of the property without changing its character
Improvement: provides a greater efficiency of function in the property - usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do.
The kitchen cupboards in Emma’s rental property have seen better days. They’re badly scuffed, some of the handles have come off and some of the hinges are broken.
She has two options:
- Re-paint and touch-up (‘make good’) the existing doors, or replace the doors with something similar in order to restore them to close to the ‘original condition’ with no structural changes to the cupboards themselves. This is considered a repair; or,
- Replace the cupboards completely (it won’t cost much more and will make the property much more attractive to rent). This is considered an improvement.
If the expenditure is a repair, then the cost will be deductible in the year that you pay for the repair, not when it occurred.
If the expenditure is an improvement, then cost will need to be claimed over a number of years in the form of depreciation. The period that we claim the costs over will vary depending on the item – e.g. Hot Water Systems are 12 years (16.67% each year on a reducing value) whereas cupboards are 40 years (2.5% per annum).
Initial Repairs (just after you purchase the property)
These are repairs or improvements that you undertake either just after you purchase the property or in order to get it ready/suitable for rental for the first time. You typically know that you will need to do these repairs or improvements when you buy the property or, if it the property is already yours, when you are getting it ready for rental.
As the cost is not a result of wear or damage from tenants but rather from the previous owner, the ATO treats these costs as improvements.
Claiming a deduction for your time
Another common question is: “Can I claim a deduction for the time I spent (or saved) if I do the work myself?”
The answer to this is, unfortunately, no. You can’t pay yourself an amount and claim it as a tax deduction (even if it is cheaper than paying someone else)!
There’s no denying that rental properties are a good strategy for investment, but it’s important to be aware of the ins-and-outs of tax deductibility – speak to us for any advice or recommendations specific to your situation.