One of the most common misconceptions with investment properties is the belief that all expenses are tax deductible. While this would often suit the taxpayer, it is not the approach taken by the Australian Tax Office. There is an important difference between repairs & maintenance and improvements, and getting it right can help reduce tax and improve your cash flow.
Expenditure on investment property can typically be categorised as follows;
Repairs
A repair is work completed to fix damage or deterioration of a property e.g. to fix part of a fence (but not the entire fence). An expense is considered a repair if it brings something back to its operational efficiency, but does not significantly improve it.
Maintenance
Maintenance is work that prevents (or fixes) deterioration e.g. servicing a hot water system.
Improvements
A capital improvement makes something better than it was originally or provides something in a new and more valuable form. Capital improvements generally increase the property’s value beyond its original state at the time of purchase, improve the property’s income generation or expected life e.g., replacing a paling fence with a brick fence.
Expense |
Claimable? |
Depreciable? |
Expense |
Claimable? |
Depreciable? |
| Gardening, lawn-mowing | Yes | No | A new stove/oven | No | Yes |
| Cleaning | Yes | No | New kitchen cupboards | No | Yes |
| Painting Internal walls | Yes | No | Building a garage or carport | No | Yes |
| Servicing a water heater | Yes | No | Removing an internal wall | No | Yes |
| Replace gutter after storm | Yes | No | Replace carpet throughout | No | Yes |
Repairs & maintenance relating to an investment property can (usually) be claimed in the financial year that they occurred, providing they relate to wear and tear or damage that occurred due to renting the property. Initial repairs to fix damage, defects or deterioration that existed when you purchased the property are (usually) not deductible, even if you carried out these repairs to make the property suitable for renting. The ATO consider these expenses to be capital expenditure and are part of the acquisition costs of the property.
By the way, you must keep proper records in order to make a claim, even if you use a tax agent to prepare your tax return. Keeping these records will help you work out your capital gain or loss correctly and ensure you don’t pay more tax than you need to.
If you would like to find out more or for further financial advice please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This publication has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions.
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