It’s a very rare day when a property manager doesn’t receive at least one call about repairs and maintenance. As you call your owner for authorisation, it is handy to be familiar with the different types of deductions investment property owners can claim.
All property managers are familiar with managing the careful negotiation which can sometimes be required between landlords, tenants and maintenance professionals to arrange a pest exterminator, organise a plumber to fix a leaking tap or even to repair guttering which has been damaged by falling branches and debris.
Tenants will no doubt be concerned if the issue they have reported is making the property uncomfortable to live in and therefore may ask to have the situation resolved relatively soon. Meanwhile, the owner may be apprehensive about spending large amounts of money to rectify the problem.
It is important to note that the Australian Taxation Office (ATO) provides legislation on how deductions should be claimed, depending on whether they are classified as a repair, maintenance or a capital improvement. Let’s take a look at the definition of each and how the ATO advises these must be claimed.
Any work completed to fix damage or deterioration of a property is considered a repair. Some examples of repairs include:
- Fixing part of a damaged fence
- Replacing part of the guttering or windows damaged in a storm.
Depending on the damage or deterioration, some repair work must be completed urgently while other work may not be as serious. As experts in the industry, property managers can help to guide their clients on what work must be prioritised.
As there is always a cost factor, it is important to note that any work classified as a repair can be claimed as an immediate tax deduction in the same financial year that the expense is incurred.
Work completed to prevent deterioration to a property is defined as maintenance. Some examples of maintenance include:
- Painting a rental property
- Oiling, brushing or cleaning something in the property that is otherwise in good working condition, for example oiling a wooden deck
- Plumbing maintenance
- Servicing an air conditioner
- Regular preventative pest control spray.
While some maintenance issues will be reported by tenants, property managers play a vital role. Their regular inspections provide a set of eyes on behalf of the landlord and keep them informed of any maintenance that should be completed immediately or in the near future.
As with repairs, any expenses incurred by the owner to complete necessary maintenance tasks can be claimed with their accountant as an immediate write-off in that financial year when they complete their tax return.
CAPITAL WORKS IMPROVEMENTS
Sometimes the work required to a property will require the removal of an existing structure or asset and replacement with a new item.
Unlike repairs and maintenance, capital improvements must be claimed as either a capital works deduction (for work completed to structural or fixed items) or as a depreciation deduction (for the improvement of a plant and equipment asset).
To help investors determine whether the work which has been completed to the property is classified as a capital improvement, the property manager should ask whether the work provides something new, or if it changes the character of the original item in any way. If the work improves the condition or value of an asset or structure beyond its original state at the time of purchase, it will be classified as a capital improvement.
If any work required will result in a capital improvement, property managers can consult a specialist quantity surveyor on behalf of their clients. As depreciation experts, they use their construction costing skills to calculate depreciation deductions and provide owners with a comprehensive depreciation schedule. This schedule outlines the deductions the owner is eligible to claim for the life of the property (forty years).
Property investors should obtain a depreciation schedule immediately on settlement of any new purchase. The deductions and information outlined in the schedule can help them improve their cash flow and even plan when to replace items as they experience wear and tear down the track.
Quantity surveyors can also assist property managers to answer any queries their clients have regarding claims for repairs and maintenance, additions or improvements made and, depending on what work has been completed, advise whether any updates to an existing depreciation schedule are required.