The ATO has announced that it will be focusing on claims made by investment property owners for repairs to rental properties that are deemed by the Tax Office as improvements.
It is a common practice for investors to make changes to their investment property shortly after purchasing it. This has led many property owners to use the term ‘initial repair’ when discussing the tax implications of such property improvement work.
Unfortunately, these types of costs are generally not deductible under the rules that allow for deductions for repairs and maintenance costs. Instead, property owners can claim a deduction for depreciation under the capital works provisions or the uniform capital allowance provisions.
The Tax Office has provided some guidance that outlines the considerations when determining whether or not an expense can be deemed as an improvement. Some of the ATO’s guidelines include:
- whether or not an item/area the property investor renewed or replaced was a fundamental and important part of the property’s structure
- whether the work carried out went further than simply meet the need for restoration of function efficiency
- whether the item/area was replaced with a new or better version
- whether the new item/area holds considerable advantages over the old version (including the fact that it may reduce the possibility of repair bills in the future)
For property investors who have carried out work on their investment property and could answer yes to some or all of the points above, then your expenditure is likely to be considered by the ATO as an improvement, and will therefore not be deductible.