This is a very interesting discussion. Many feel it is based on opinion, while some feel it’s the same thing. However, there is a difference between repairs and improvements. Property investors this is a snapshot for you.
This will help you know what’s tax deductible and what is not.
What is a repair?
Put quite simply, a repair replaces a part of something that’s already there. This has occurred due to something becoming worn out or completely unusable. By replacing something it will restore its use to it’s original state. This generally means a repair is partially fixing something rather than replacing it. An example is when a burst pipe breaks in the laundry. It needs to be fixed and partially repaired so that the water can continue to flow through the pipe. In this case, you have repaired the pipe, but not replaced the pipes.
If this is an investment property, you may be entitled to claim an immediate tax deduction for the cost of repairs.
What is an improvement?
An improvement differs from a repair. An improvement is where you replace it with something new. By replacing and improving it, you are essentially making it better than what it was originally. An example is when you replace the kitchen/bathroom benches from laminate to stone. The benches may have been repaired, but in this case it has been improved to a superior fit-out. Other examples may be redesigning a bathroom, adding an alfresco, extending the size of the home or replacing a carport to a secured lock-up garage.
An improvement will increase the value of your property or potentially increase the rental income.
The difference between repairs and improvements
Repairs and improvements are treated different and should be well understood. As mentioned repairs can be tax deductible. However, improvements are not. You may be able to claim a capital works deduction for improvements. Capital works deductions can be claimed over a number of years, but the amount you can claim may vary depending on the type of construction works completed or when it was done. The cost of improvements may be included in cost base of your investment property. This will obviously reduce the capital gain tax (CGT) when selling the investment property in the future.
What should I do to make sure I claim this correctly?
As with any tax matter, we recommend consulting a qualified accountant or tax agent. They will help you ascertain the difference between repairs and improvements. They will also help you meet your tax obligations by retaining evidence to what you’ve done to the investment property.
The Australian Tax Office also has some factual information to help.
At Crest Property Investments we help source brand new and off-the-plan properties for buyers. If you’d like to learn more, please don’t hesitate to contact us
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
July 2019
