If you own a rental property and you missed reading my September column it would be a good idea to download page 28 of the September edition of The Diary and read Part A of this topic before progressing to this month’s column.
A key area where the ATO has found a high level of poor compliance is claiming deductions for repairs and maintenance expenditure.
Distinguishing between Repairs that are Deductible and Not Deductible
Repairs comprise expenditure that replaces or renews worn out or broken parts of the rental property and its fixed contents and is a result of wear and tear from renting out the property. Examples include replacing broken windows, repairing fixed appliances and painting the property. These repairs must be incurred as a consequence of renting the property in order to be deductible.
A common trap is to claim these repairs in the year the property is acquired and before letting out the property. In this case the repairs are not deductible but instead should be added to the property’s cost base where they will be taken into account in calculating the capital gain or loss upon sale of the property.
It is important to distinguish between repairs and improvements as the latter are not deductible. Improvements fundamentally change the property that previously existed rather than returning the property to its original condition and include major expenditure such as adding a deck or additional room to the property or upgrading aspects of the property such as refurbishing the kitchen or bathrooms. These costs are deemed to be of a capital nature and are added to the property’s cost base.
Often owners forget to retain records of expenditure that is not deductible as repairs so a good tip is to ensure you have a file for all expenditure that forms part of the property’s cost base which will be needed to include in the calculation of the capital gain or loss when the property is sold.
Claiming Depreciation on Contents
Depreciable contents fall into four categories.
- Contents that rental property owners have purchased subsequent to the date of purchase of the property. This deduction has always been available and is included in the deductions claimed in the rental property schedule in your tax return.
- Contents that were included in the purchase price of rental properties purchased prior to 9th May 2017 were also able to be depreciated over their remaining depreciable life and continue to do so.
- Rental property owners who have purchased second hand residential properties after 9th May 2017 can no longer claim depreciation on existing contents as they are deemed to form part of the purchase price of the property and can no longer be depreciated as severable assets. They will of course be reflected in the cost base of the property for capital gains tax purposes.
- If you have purchased new residential rental property after 9th May 2017 depreciable contents will not be second hand and depreciation will be claimable at the appropriate rates under Division 40 of the Tax Act.
Claiming the Building Construction Cost Deduction
This Div. 43 deduction writes off at 2.5% p.a.over 40 years the construction cost (including subsequent capital improvements) but NOT the purchase price of the rental property building.
Examples of expenditure that can be claimed include:
- preliminary expenses such as architects and engineers fees
- the cost of foundation excavations
- payments to tradesmen for the building construction labour and materials
- payments for the construction of retaining walls, fences and in ground swimming pools
Examples of expenditure that cannot be claimed include:
- the cost of land upon which the rental property is built
- expenditure on clearing the land prior to construction
- expenditure on landscaping
Trap: This Div. 43 deduction is sometimes overlooked as previous property owners may not have this information available to pass on to new purchasers, and most certainly would not have this information if the property had not previously been a rental property.
Tip: If you have a residential rental property and you have not engaged a Tax Depreciation Quantity Surveyor such as BMT or Washington Brown to prepare a depreciation report for your property, you could be missing out on thousands of dollars of deductions that you are rightfully entitled to and remember, their fee which is usually less than $1000 is also tax deductible.
Disclaimer:
The content of this article is not intended to be relied upon as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent.
Brian Spurrell B Arts, B Com, FCPA, CTA, Registered Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
PO Box 143 Warrandyte 3113 Ph: 0412 011 946
Web: www.ptasaccountants .com.au