What’s the difference between a repair and an improvement?

By Maria Milillo, Raine & Horne
APRIL 1, 2018

With the end of the tax year fast approaching, the Australian Tax Office (ATO) will be taking a keen interest in any deductions you claim for repairs, maintenance and improvements when you file your annual tax returns. For this reason, investors must recognise the difference.

Repairs are considered work completed to fix damage or deterioration of a property, for example replacing part of a damaged fence, according to valuation firm BMT.

Work completed to prevent deterioration of a property is labelled maintenance. This work might include the oiling of a deck around the pool, for example.

Any costs incurred in repairing or maintaining a rental property can be claimed as an immediate 100% deduction in the year when the work was completed.

On the other hand, a capital improvement occurs when the condition or value of an item is boosted above its condition at the time you secured the property. For example, if you add a new cabana to the pool deck. The cabana must be classified as either a capital works deduction and depreciated over time.

To add to the complexity, when you buy an investment property, there are often items that need repairing before you can lease it to tenants. The ATO calls these expenses, ‘initial repairs’ and they can’t be claimed as deductions or depreciated as improvements. Instead, they are considered part of the costs of buying the property and may be included in the capital gains tax (CGT) cost base. In other words, these expenses can be used to reduce your CGT liability when the time arrives to sell the property.

Investors considering completing any work on their property should contact a specialist quantity surveyor such as BMT for advice or talk with their accountant before they start work. You can contact BMT on 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.