- May 15, 2019
- Posted by: admin
- Category: Commercial Property, House & Land Packages, Property Depreciation, Sample Depreciation Schedule
How do you decide whether an expense should be claimed as … a Repair & Maintenance item or a Capital Improvement?
This can be a very confusing space to navigate, but it is important that the claims made are accurate. “Get it right”, is the advice given to rental property owners from the Australian Taxation Office (ATO).
The following are some guidelines and common deductions that you need to be sure are claimed correctly for rental properties:
- Ensure that the expenses claimed are accurate and only include those expenses that are incurred after the property is available to rent.
- Deductions can only be claimed according to the percentage of time the property was made available for rent.
- Make sure to check whether money spent on the property should be claimed as a repair and maintenance or depreciated as a capital improvement.
- And finally make sure that any capital works are not incorrectly claimed as plant and equipment.
It is in the best interest of property investors to have some understanding of depreciation legislation and how to categorise the deductions which can be claimed.
The Australian Taxation Office provides a comprehensive “Guide for Rental Property Owners” Here is the link to the most recent publication of this guide “Rental Properties 2018“.
Capital Works Deductions (Div 43) versus Plant and Equipment Depreciation
Capital works deductions include elements of the structure that are fixed irremovable assets. This will include concrete, brickwork, windows, walls, built in cupboards and cabinets, clothes lines, windows and doors.
Investors can claim capital works deductions at a rate of 2.5% per year.
Residential property constructed prior to the 15th of September 1987 have restrictions which apply. Older properties with renovations, including those by previous owners, may still be entitled to capital works deductions.
Plant & equipment include curtains & blinds, carpets, floating floor, ovens, dishwashers, hot water system, air conditioning and security systems and can depreciate more quickly. The quality and condition of these items will determine the monetary deductions that can be made.
To calculate depreciation for plant and equipment, the effective life of each individual asset set by the ATO should be used.
It’s not uncommon for investors to self-assess depreciation deductions for plant and equipment items.
However, by doing so they are putting themselves at risk of the following mistakes:
- They can categorise plant and equipment assets as capital works deductions or vice versa.
This mistake can result in plant and equipment assets being claimed at only 2.5% per year, rather than at their higher effective life rate.
It can also lead to capital works items being claimed at higher rates than they should be, placing the investor at an increased risk of an ATO review of their claim and potentially resulting in them having to pay cash back.
- They could incorrectly determine a plant and equipment asset’s effective life based on its condition.
For example, they may believe a carpet only has a remaining effective life of two years.
However, carpets are deemed as having an effective life of ten years in residential properties.
Incorrectly determining an assets effective life could result in missed claims.
The Australian Taxation Office (ATO) provides a comprehensive “Guide to Depreciating Assets”. Here is the most recent publication of this guide “Guide to Depreciating Assets 2018“.
Repairs and Maintenance versus Capital Improvements
A time will come for all investors when work is required to ensure upkeep or repair damage done to their property. The work completed can improve an item’s value beyond the original condition of an asset.
The ATO provides clear definitions to help investors determine the difference between what is considered a repair or regular maintenance and what is defined as a capital improvement.
Repairs involve any work completed to fix damage or deterioration of a property such as leaking taps, damage caused by a storm.
Maintenance is considered work which will prevent damage or deterioration such as carpets being cleaned or oiling a deck.
The costs for repairs and maintenance can be claimed as a 100 per cent deduction in the same year of the expense.
However, if an investor was to remove and replace the entire fence, carpet or build a new deck, this will fall into the category of capital improvements.
Capital improvements, or work which improves an asset beyond its original condition, must be depreciated and claimed as a capital works deduction or as depreciation.
Investors can ensure they are claiming depreciation correctly for their property by seeking the advice of a Quantity Surveyor.
A well prepared depreciation schedule should always include a thorough site inspection of the property to identify all of the plant and equipment, take measurements of the property including any common areas.
The capital works deductions are calculated either directly from the build contract (if available) or from research and data that has been collected by our office or other sources that maintain databases on historical construction costing.
Claims calculated for the depreciation of the “depreciating assets” (plant & equipment) are based on an assessment of the condition of the asset and its effective life that is set by the ATO.
A tax depreciation schedule will outline all deductions for the property owner’s Accountant to process their claim.
A depreciation schedule provided by a Quantity Surveyor will help to ensure the correct deductions are claimed to maximise returns and minimise risk for both an investor and their Accountant.