Guide to business repairs & maintenance

Guide to business repairs & maintenance

Building Repair And Maintenance

Repairs and maintenance can be a major cash outlay for an owner of a business or a rental property and hence the ability to claim an instant tax deduction can have a significant impact on the year end tax bill.

What are the rules?

Broadly speaking, expenditure on repairs and maintenance is an allowable tax deduction in the period it’s incurred. Capital expenditure is not deductible, but it is subject to depreciation rules, meaning a deduction may be available over time.

The general process to work out deductibility is a two step approach. First, we need to identify the asset. Then we need to assess the nature and extent of work carried out. The following questions can be helpful in evaluating the work:

  • Does the expenditure increase the useful life of the asset, or its output or efficiency?
  • Is the expenditure recurrent?
  • Does the expenditure create a new asset that did not exist before?
  • Does the expenditure confer an enduring benefit to the taxpayer?
  • Does the expenditure relate to the profit-earning process or the profit-earning structure of the business?

Let’s consider two examples.

Example 1

Maria has owned for many years a rental property with a concrete tile roof. Over the years the tiles have broken and begun to leak. Maria decides to replace the roof but concrete tiles are no longer an available product to use. Instead she replaces the roof with new steel-backed roof tiles (an equivalent building product in today’s environment). Is the asset the roof or the home itself? In this case the asset is the house itself rather than the roof, with the roof being part of that asset. Whilst the roof was replaced with different materials, the house has not been improved in any way, so the expenditure is a deductible expense.

Example 2

A property investor purchases a dilapidated house for $80,000 less than other similar properties in the area. Before renting it out she repaints and re-carpets the house and replaces the showers. Whilst ordinarily much of the above expenditure would be considered repairs and maintenance, in this case it’s capital non-deductible because (a) the house was recently acquired and (b) the purchase price was less due its rundown state.

Low value assets

Before 2020 assets costing less than $500 did not need to be capitalised and depreciated. Instead they were tax deductible. As part of the COVID relief measures the threshold went up temporarily to $5,000. From 17 March 2021 that value was reduced to $1,000. So as an example, if a rental property owner purchased a $999 portable heater in May 2021, she can claim the whole amount as a deduction in her 2022 tax return under the low value asset rule.

How we can help

The difference between repairs and improvements can be complex. Reach out to The Accounting Hub and we will help to establish if the cost of the work is immediately tax deductible or needs to be capitalised.

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