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Differentiating Between Repairs & Maintenance and Capital Improvements

With tax time upon us, many individuals, business owners and their accountants are looking at which expenses can be deducted from last financial year’s tax return. An important part of this endeavour is to ensure that you can accurately determine whether work done on an investment property, business premises, plant, machinery or tools falls under “Repairs & Maintenance” or “Capital Improvements”. The distinction can sometimes be hard to make, so read on to understand the differences and how that impacts your deductions.

The Difference Between Repairs & Maintenance and Capital Improvements

According to the Tax Assessment Act 1997, repair is defined as “the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense)”. Put simply, repairing something means to restore something to its original condition (or close to) without changing its character. In the context of tax deductions, something can be fairly described as “repairs” if they are performed to fix:

  • Deterioration from ordinary wear and tear
  • Accidental or deliberate damage
  • The operation of natural causes over time

Maintenance is defined as work conducted in anticipation of, or to prevent, damage or deterioration of property or equipment. Examples of this include repainting faded walls, maintaining plumbing and deck oiling. Repairs and maintenance often go hand in hand, hence why they are defined together, and separately from capital improvements.

Capital Improvement is any works that improve something beyond its original state, in providing greater efficiency of function, significantly improving the value of the property or equipment, extend its expected working life, and/or enhancing its income-producing ability.

How This Impacts Deductions

The reason it is important to know the difference between Repairs & maintenance and capital improvements is that depending on which category an item or works falls into, deductions can be claimed immediately or over time. Costs to repair or maintain something like an investment property or your business premises can be claimed as an immediate deduction, in the year that the expense was incurred. On the other hand, capital works are not immediately deductible and must be classified under “capital works deductions” or “plant & equipment depreciation”. A definition for each is as follows:

  • Capital Works Deduction: deductions available for a building’s structure and permanently fixed items. For example, adding an extension to a property would likely be considered capital works for the purposes of a tax deduction. Generally, the rate of deduction for this is 2.5% per year for 40 years from the date of construction. A higher rate (4%) is applicable for some property types.
  • Plant & Equipment Depreciation: Assets that are mechanical in nature or can easily be removed from the property would likely be considered Plant & Equipment for tax purposes. If an owner were to install new assets like appliances or curtains, this is likely to be a depreciating asset, and its condition, quality and effective working life are all factors in determining the deductions available. They can be depreciated using the diminishing value or prime cost method.

How MP+ Can Help

As is often the case with tax matters, it can be a bit tricky to navigate the deductions available to you as a business owner or property investor. There are often some grey areas where a call will need to be made as to the nature of an item or the deduction that might apply to it. This is where it is crucial to have an accountant on your side. The tax team at McKinley Plowman have been helping clients for over 25 years maximise their deductions and legally minimise their tax obligations. So whether you’re in business or looking to expand your property portfolio, there’s no better time to get in touch with us on 08 9301 2200 or contact us via our website.

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