It is important to distinguish between a repair and an improvement when undertaking maintenance on a rental property, as the taxation treatment is very different.
A repair involves replacing a part of something or restoring something to its original working order without changing its character in its entirety. Repairs are deductible for tax purposes and generally include painting, repairing gutters, maintaining plumbing, replacing broken windows. However, the cost of initial repairs are of a capital nature and are non-deductible on the basis they are incurred too soon in the income producing process. Initial repairs are included in the cost base of the asset for CGT purposes.
Improvements includes substantial improvements, additions and alterations and are not immediately deductible as they are of a capital nature. The deduction can still be claimed over more than one year by depreciating the asset over its useful life or a capital works deduction spread over 40 years.
In order to determine what constitutes an improvement, factors that need to be considered include whether there is greater efficiency in the function of the asset, whether there is an increase in the value of the asset and whether the expenditure reduces the likelihood of future repairs.
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