Correctly classifying improvements and deductible repairs for rental properties
Making the distinction between a repair and an improvement for expenditure incurred in relation to a rental property is important. This is primarily because work done to a rental property that qualifies as a ‘repair’ is generally deductible under S.25-10, whereas work done to a rental property that constitutes an ‘improvement’ is not deductible under S.25-10. Refer also to Taxation Ruling TR 97/23.
Specifically, under S.25-10, a landlord is entitled to claim a deduction (in whole or part) for repair expenditure incurred in relation to a property where:
- at the time the expenditure is incurred, the property is being held or used (wholly or partly)
for income-earning purposes; and
- the expenditure is not of a capital nature.
Where the expenditure is not a repair for the purposes of S.25-10 (i.e., it is a capital improvement) expenses will have to be further analyzed to determine if they can be written off under the capital allowance rules in Division 40 or Division 43 of the ITAA 1997