Repairs or Improvements – Don’t Get Fined!

Hello Chasers,

With Tax Planning well underway for our customers, now is the time to review some of your expenses, particularly if you have a rental property.

The ATO is paying close attention to the expenses claimed by landlords, especially those operating in the Airbnb space. They are ramping up its enforcement activities and will undertake 4,500 audits of taxpayers it considers are “high risk” because they overclaim or don’t declare income relating to rental properties.

One area that is quite often misunderstood by landlords is the area of repairs & maintenance.

They think that if they buy a house and get the keys and decide it needs an internal paint before they try and get a tenant, they should be able to claim that painting expense as repairs and maintenance.

The ATO advised that a repair is an expense that restores the efficiency of function of the asset without changing its character, to maintain it in its original state. For example, you can fix defects or renew parts, but you can’t totally reconstruct something.

Improvements are an expense associated with establishing, replacing, enlarging or improving your asset. For example, initial repairs made to machinery, tools or property immediately after you purchase or acquire them – this is because the price you paid reflects the item’s condition.

The term ‘Initial Repairs’ is one the ATO use to describe exactly this scenario i.e., a client buys a property and does work on it BEFORE renting out the property. Initial Repairs are treated as Improvements and are treated as Capital Works and depreciated by a quantity Surveyor on a specialised tax depreciation report at 2.5%.

Other things a landlord might do to a property immediately after purchase and think it’s a Repair include replacing a whole asset (plant & equipment such as stoves, air con units, hot water systems, floor coverings, fences).

What about older rental properties that have been rented for several years and need a bathroom upgrade because of a leak or the waterproofing has failed?

The landlord will need to be very careful on how the invoice is to be split between repairs and improvements.

Solicitors, valuers, real estate agents and accountants – yes, that’s right, accountants are NOT qualified to provide a specialised depreciation report to estimate the construction costs and separate them from the tradesperson’s profit margin in order to claim the 2.5% depreciation.

We use a specialist to do this.

If you have a query in relation to your rental property expenses please contact the team on 55612643 and get the right advice.

Have a great day!

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