Repairs vs. Improvements: A Tax Guide for Australian Property Investors

1. Repairs: What Qualifies?

A “repair” restores a property to its original condition without enhancing its value. Examples include fixing a broken window, repainting faded walls, or replacing a faulty pipe.

Tax Treatment: Immediate 100% tax deduction in the financial year the expense is incurred.

ATO Criteria: Must be "partial, occasional, and non-upgrading".

Example: Replacing a damaged carpet section costs $800 → “$800 fully deductible”.

Initial Repairs (e.g., fixing pre-existing damage at purchase) are “not deductible” and must be added to the property’s cost base for CGT purposes.

2. Improvements: Capital Works and Deductions

An “improvement” enhances a property’s functionality, value, or lifespan. Examples: kitchen renovations, adding a deck, or installing solar panels.

Tax Treatment: Claimed via “Capital Works Deductions” (Division 43) over 40 years at 2.5% annually for residential buildings constructed after September 1985.

Depreciation of Assets (Division 40): Appliances (e.g., air conditioners) depreciate over their effective life (e.g., 10 years).

Data Insight:

A $20,000 kitchen renovation → “$500/year deduction”for 40 years.

New $5,000 air conditioner → “$500/year” over 10 years.

3. Key ATO Compliance Rules

Initial vs. Ongoing Repairs: Repairs for damage occurring during tenancy are deductible; repairs for pre-existing defects are not.

Progressive Repairs: Replacing a fence in sections over time may qualify as repairs, but full replacement is likely an improvement.

Documentation: Keep invoices, photos, and contracts for all work. A “depreciation schedule” by a qualified quantity surveyor is critical for audits.

Audit Red Flags:

Claiming initial repairs as immediate deductions.

Misclassifying improvements (e.g., a bathroom remodel) as repairs.

4. Strategic Tax Optimization

Timing Repairs: Complete deductible repairs before June 30 to accelerate deductions.

Split Expenses: Separate repair costs (e.g., $1,000 for patching roof tiles) from capital improvements (e.g., $10,000 for a new roof).

Leverage Depreciation: For a $500,000 investment property built in 2020, annual Capital Works Deductions could reach $12,500/year (2.5% of $500,000).

Policy Updates (2024–2025):

Victoria increased stamp duty surcharges for foreign buyers to 8%.

ATO scrutiny on "excessive" repair claims in high-value rental properties.