Owning an investment property will invariably result in having to spend some money on it.
The good news is that the tax man (perhaps we need a gender-neutral term but technically the tax commissioner is a man) will let you claim that expenditure as a deduction.
However, not all deductions are equal.
Spending money on your investment property is likely to be classified as either a depreciable improvement or repairs and maintenance.
Repairs and maintenance are by far the best outcome, as you’ll be able to claim 100% of the cost as an immediate deduction within the financial year the cost is incurred.
So, why don’t we just say everything is repairs and maintenance?
Well, there are very clear rules the ATO have provided, and breaching those will likely have you on the receiving end of Thor’s hammer (some say the ATO keep this in a filing cabinet, maybe check with four corners.)
Let’s get back on track, shall we?
To save you from that, here’s some definitions;
1. replacing part of the guttering or windows damaged in a storm;
2. replacing part of a fence damaged by a falling tree branch;
3. repairing electrical appliances or machinery.
Maintenance refers to:
Work to prevent deterioration or fix existing deterioration, such as;
1. painting a rental property;
2. oiling, brushing or cleaning something that is otherwise in good working condition;
3. maintaining plumbing.
An improvement is work that:
1. provides something new
2. generally furthers the income-producing ability or expected life of the property
3. generally changes the character of the item you have improved
4. goes beyond just restoring the efficient functioning of the property.
So as per the above, repairs and maintenance are generally only things that maintain or repair an existing asset.
The moment you replace something with something else, it becomes an improvement, even if the old asset was ruined or needed to be replaced.
An improvement is most likely to be classified as division 43, which is the same as the structure of the building.
This means you’re able to claim 2.5% of the value each year for 40 years. So, you get $2.50 back in deductions for every $100 of expenditure.
Of course, it’s much better to be a repair as an instant deduction, rather than having to wait for 40 years to claim the whole value.
Sadly though, the definitions are clear from the ATO but it’s always worth having the conversation with your accountant.
Remember though that even repairs and maintenance can’t be an instant deduction if “they did not relate directly to wear and tear or other damage occurring due to renting out your property.”
The good news is though they can still be claimed as an improvement once the property becomes income producing.