Ask Ban Tacs Question
Can I claim costs associated with a property I am living in (such as capital improvements) if the property has previously been rented out? If so, what types and in what way are these expenses claimable (eg. added to the cost base for CGT purposes). If not, would it make a difference if we got quotes on (or even committed to doing) these works prior to moving in?
Answer
Capital improvements by their nature are never tax deductible but can of course increase the cost base of the property. This is important in your case as I assume, through being a rental it is exposes to CGT. Fortunately, the way the formula works the costs incurred while you are living there (after it has been used as a rental) can reduce the capital gain for the period it is a rental.
Repairs on the other hand would be deductible if they are attributed to the period the property was rented and “incurred” before the end of that financial year. To incur the expense you have to, as you describe, commit to it not necessarily have paid it. Quotes and instructing the person to go ahead would suffice.
Here is a link to IT 180
http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT180/NAT/ATO/00001
The important part of that ruling for you is:
a deduction may be allowed for the cost of repairs to property providing:-
(a)
the necessity for the repairs can be related to a period of time during which the premises have been used to produce assessable income of the taxpayer, and
(b)
the premises have been used in the production of such assessable income of the year of income in which the expenditure in incurred.
Now to the difference between repairs and improvements:
You may consider painting to be an improvement but if the need to paint arose while it was rented then it is a repair. Note no deduction or depreciation is available for your own labour.
Taxation Ruling (TR) 97/23 is the main authority on whether an expenses is a repair or improvement. A repair can be classed as an improvement if it does not restore things to their original state; for example, replacing a metal roof with a tiled roof. In this case the whole cost of the tiled roof would be an improvement and no deduction would be available for what it would have cost you to put up another metal roof.
This doesn’t mean that you must use the original materials to restore the thing or structure to its original state. Modern materials can be used, even when these might be a slight improvement because they are more efficient. As long as the benefit is only minor or incidental it can still be considered a repair.
Tree removal is claimable if the trees have become diseased or infested during the time it was a rental or if the trees are causing damage, such as roots interfering with pipes, and the damage happened while it was a rental. If a tree is removed because it may cause damage in the future, or you are fed up with the leaf litter, then you are making an improvement that is not deductible.
Replacing something completely or in its entirety is not considered a tax-deductible repair. Replacing or restoring something in its entirety means that substantially the whole of something has been repaired. The ‘something’ needs to be separately identifiable.
If, for example, you replace almost all the fence on a property, you are replacing it in its entirety, but if it is ultimately replaced by a series of repairs over several years then that is a deductible repair (TR 97/23, paragraph 119).
Replacing a window or a wall in a building is not a replacement in its entirety because the whole is the building. Equally, replacing locks or an exhaust fan is a repair because it is not a replacement in its entirety. Replacing a roof is not a replacement in its entirety because the entirety is the walls and roof .
In the case of Domjan and Commissioner of Taxation [2004] AATA 815, it was held that a vanity basin had not been replaced in its entirety because the same water pipes were used. But according to TR 97/23 paragraphs 113 and 114, you can replace almost all of something and still be considered to have replaced it in its entirety, so no deduction. Replacing all the cupboards in a kitchen so they match, rather than just replacing the damaged one, will mean that none of the expenditure is deductible.
A minor improvement as part of a repair will still be fully tax-deductible, but once you start to improve function or use materials significantly stronger than previously existed, none of the costs may be deductible because it is considered an improvement (TR 97/23, paragraphs 16 and 22). If you can show separately the price of repairs done together with improvements and initial repairs, you can still claim the repairs (TR 97/23, paragraph 136). While not technically a repair, preventative maintenance is also deductible (TR 97/23, paragraph 20).
If you replace a piece of plant or equipment any remaining undepreciated portion of the old plant or equipment is claimed as an outright deduction if it is ‘scrapped’. Scrapping is the removal and disposal of any assets with depreciation potential from an investment property. Scrapping can also apply to any unclaimed building depreciation
ID 2010-35 says that a deduction for scrapping is strictly determined by the last use of the property, so you will only be able to scrap items if they are removed before you move in and of course if you can organise this before the 30th June
