If you have a rental property, you can claim a tax deduction for the cost of repairs or improvements to the property. In previous years, the ATO have focused their audit activity on the difference between repairs and improvements, so this post contains an overview of the important concepts.
What is a Repair?
A repair restores part of the property to a previous condition.
- Replacing a damaged fence post with a similar fence post.
- Replacing an old roof tile, with a similar roof tile.
- Replacing a broken door handle.
- Painting a marked section of wall in the same colour as the surrounding area.
What is an Improvement?
An improvement is a change that makes part of the property better than any previous condition.
- Replacing a wooden section of fence with a new aluminium fence.
- Replacing a roof tile with a solar roof tile.
- Replacing a door handle with a better door handle.
- Building a new internal wall.
In addition, the ATO have highlighted a common mistake: repairs to the property that restore it beyond the condition of the property at the time of purchase are also considered improvements.
The Difference on Your Tax Return
A repair can be claimed in the year that you incurred the cost.
An improvement must be claimed in smaller portions over multiple years. The exact number of years can vary between two and 40, depending on the type of improvement, meaning that the deduction may only make a small difference to your tax bill each year.