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Tax Deductions: Repairs vs. Improvements on Rental Properties

The Australian Taxation Office (ATO) is focusing on the claims of property investment owners with regards to the “improvements” of their rental residences.

Oftentimes, investors will have some work done on their newly purchased properties and would claim these as “initial repair” when discussing the tax implications of these property works. However, the Tax Office reminds that generally, these costs are not specifically deductible under the provisions that allow the deductions on repairs since these expenses are on capital account.

Here is the ATO’s illustration on this type of scenario:

“A tax payer recently claimed repairs and maintenance for a newly acquired rental property, which was significantly improved upon purchase. The taxpayer provided an invoice from an interior developer for the ‘refurbishment’ of the property. Further documentation detailed the scope of the refurbishment, which included completely stripping the property and replacing old fixtures and fittings with new. The large repairs and maintenance claim was disallowed because initial repairs and improvements to a property are not deductible.”

A deduction on these “initial repairs” may instead be claimed for depreciation under the uniform capital allowance provisions or the capital work provisions.

The ATO has provided guidelines to provide a clear understanding of what improvements are:

  • Whether or not the thing replaced or renewed was a major and important part of the structure of the property;
  • Whether the work performed did more than meet the need for restoration of “efficiency of function”, bearing in mind that “repair” involves restoration of a thing to a condition it formerly had without changing its character;
  • Whether the thing was replaced with a new and better one, and;
  • Whether the new thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future.

If the work done on a rental property fits these categories, then the cost would most likely be categorised as an improvement and is therefore not deductible.

The ATO also provided an illustration to distinguish improvements and repairs on a rental property:

“Mary Fabrica owns a factory in which the bitumen floor laid on a gravel base needs repairing. She replaces it with a new floor consisting of an underlay of concrete topped with granolith (a paving stone of crushed granite and cement).

The new floor, from a functional efficiency (rather than an appearance) point of view, is not superior in quality to the old floor. The new floor performs precisely the same function as the old and is no more satisfactory. In fact, the new floor is more expensive to repair than the old.”

In this scenario, since the new floor is not a substantial improvement, but a repair, the cost is most likely deductible.

If you need help in determining the difference between improvements or repairs in your rental residence, or would want professional advice on your property investments, you can contact our property experts at (08) 9301 2200.


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