Replacement Fence & Bathroom Repairs

Hi there,

I have a couple of questions in relation to tax deductions on fencing and bathrooms.

I recently replaced the fences on 2 sides of a property:

Side 1: Call came from tenant because the fence was falling down and rather than repair the old fence I decided to replace it with a new fence. Depreciation or maintenance ?

Side 2: Old fence also in need of repair but still functioning OK I suppose. At the same time as replacing side 1 I replaced side 2. Depreciation or maintenance ?

On another subject, I recently had a problem with a leaking shower where the whole shower recess, tiles, screen etc had to be replaced as a result. The existing shower was in extremely good condition (only about 2 years old) and I have photos to show that there was no real "improvement" as such.

What would be the situation here ? How can this be claimed ?

Any advice would be greatly appreciated.

Thanks
PIppety
 

Sim

Administrator
The simple way of differentiating between repairs and capital improvements is to ask yourself:

Are you going to "make good" the fence, or are you going to "improve" the fence.

To make good you would be taking existing material (with some replacement as necessary) and getting back to the order it is supposed to be in.

To improve you would be removing the old fencing material and replacing it with new material - especially if this material is of better quality than what was already there.

Now if you only actually replace some parts of the fence with new material, but mostly it was just fixing up the old stuff, I'd still be happy classing this as repairs.

My real life example: one fence (corrugated iron) almost completely falling down, very rusted - no real chance of restoration... the old fencing sheets were removed and replaced with new zincalume. Posts were rotten and falling down, so were replaced with new steel posts. Clearly this is an improvement and so is not a "repair"

If I hadn't replaced the fence posts - but only replaced the fencing sheets, then I still would consider it an "improvement" since the majority of the fence was replaced - not simply repaired.

An accountant may disagree with my analysis !
 
Sorry Sim,

Can a non-accountant question, rather than disagree with, your diagnosis?

My questions would be based on what Dale has posted in the past.

What I would suspect is that it might depend on what condition the property was when you acquired it.

If the condition was lousy already, then you're improving it. The property was bought in that bad state of repair, and you're improving the property. The price of the property reflected the impreovements required.

But if you've had the property for a few years, and it's deteriorated, then I would suspect it's repairs- you're just bringing it back to original state.

And I guess there's a grey area between the two views.

Even if it is an improvement, there may well be scope for depreciating that improvement. So even if you can't claim the cost this year, you may be able to over a period of time. Whatever ATO regard as a lifetime of a fence.
 
Sim,

I suppose my argument in terms of fence "Side 1" is that although it is new it has not improved the property. (ie. I replaced a 6ft timber fence with a 6ft timer fence).

The way I see it's no different than painting a room. You may "repair" the room to it's original standard by painting it which is classed as maintenance.

All I am doing is returning the fence to it's original condition ?

Perhaps I am being a bit optimistic ?

PIppety
 

Sim

Administrator
No PIppety... I don't think are being "too" optimistic - my first example where we upgraded the type fence - is an improvement. My second example - which is close to your situation - may well be acceptable as a "repair" - hence my disclaimer about an accountant disagreeing with my analysis.

Of course, if they did disagree with me, I strongly suggest you follow their advice ;)
 

Sim

Administrator
Originally posted by geoffw
What I would suspect is that it might depend on what condition the property was when you acquired it.

Personally I don't see this at all - it has to do with the individual item involved - getting it back to it's "good" condition - regardless of whether it has been bought/sold/whatever and regardless of what price you think you paid for the property.

Particularly I am ignoring any concept of the supposed lack of deductibility of "repairs" in the first year of owning a property - I don't think that is relevant to this situation anyway.

Originally posted by geoffw
Even if it is an improvement, there may well be scope for depreciating that improvement. So even if you can't claim the cost this year, you may be able to over a period of time. Whatever ATO regard as a lifetime of a fence.

40 years I believe. Something like 2.5% per year is the rate I think.
 
Signifance of terms

What is the signifance of the terms
-improvement
-repair
-maintance
as far as immediate tax deduction and/ or depreciation. Also please fit the 12 month rule in somewhere

Thanks
Scott
 
Scott,

I'm an amateur. I'm just trying to learn.

An opinion from Dale would be quite welcome here. Otherwise I might be leadinf people astray.

Geoff
 
Re: Signifance of terms

Originally posted by scott
What is the signifance of the terms
-improvement
-repair
-maintance
as far as immediate tax deduction and/ or depreciation. Also please fit the 12 month rule in somewhere

Thanks
Scott

Hi SCott!

The courts and tax law have tried very hard to define these 3 things many, many times over the last 66 years, and not always with success . . . so, please bear with me as i try to explain in simple terms.

The best way to think of these is to take the ordinary dictionary meanings, bye the way.

An improvement is where you have effectively replaced an item with a better one. You would normally depreciate an improvement.

A repair is where you restore the item to its original state and is normally tax deductible.

To maintain something is very similar to a repair and is normally tax deductible.

The basic "first year" rule is that repairs are not tax deductible in the first year that you own a property. This is because the tax office argues that you bought the place in disrepair and you cannot be returning it to its original state when you first owned it.

The exception to this rule is if the tenants cause damage and you rectify it.

Does this help?

Dale
 

Sim

Administrator
Re: Re: Signifance of terms

Originally posted by DaleGG
The basic "first year" rule is that repairs are not tax deductible in the first year that you own a property. This is because the tax office argues that you bought the place in disrepair and you cannot be returning it to its original state when you first owned it.

And just to make things worse (more confusing) for people... there are accountants out there who disagree with Dale on this one !
 

Sim

Administrator
You should all read the ATO's publication "Rental Properties 2002"... it covers a lot of these areas quite clearly.

http://www.ato.gov.au/content.asp?doc=/content/Individuals/22711.htm&bn=AS/IN/IN/IN01/A

Note that no where in this document does it mention that you cannot claim a deduction for repairs made in the first 12 months. Just to be clear though - it does explicitly state that you cannot claim for repairs made to items which were broken or in a state of disrepair when you purchase the property. This is where the contention lies - at which point is it reasonable to conclude that repairs were as a result of items being damaged or breaking while you owned the property ? (hence Dale's assertion of his "12 month rule").

My accountant takes a different approach - and expects detailed documentation on the nature of the repairs and works it out on a case by case basis - there are some repairs in the first 12 months which obviously occurred due to failure after purchase.

You should discuss this with your own advisor - if you have an issue with the ATO it is your own advisor who you will need to rely on to see you through.

I have highlighted some interesting text below:

- - - - - - - -

Repairs
Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.

Repairs generally involve a replacement or renewal of a worn out or broken part - for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a fallen tree branch.

However, the following expenses are capital, or of a capital nature, and are not deductible:
- replacement of an entire structure or unit of property (such as a complete fence or building)
- improvements, renovations, extensions and alterations
- initial repairs - for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.

You may be able to claim capital works deductions for these expenses - for more information, read the section Capital works (special building write-off) deductions below. Expenses of a capital nature may form part of the cost base of the property for capital gains tax purposes (see the publication Guide to capital gains tax) - but not to the extent that capital works (special building write-off) deductions have been or can be claimed for them.

- - -

EXAMPLE
Repairs prior to renting out the property

The Hitchmans needed to do some repairs to their newly acquired rental property before the first tenants moved in. They paid an interior decorator to re-paint dirty walls, replace broken light fi ttings and repair 2 bedroom doors. They also discovered white ants in some of the floor boards. This required white ant treatment and replacement of some of the boards.

These expenses were incurred to make the property suitable for rental and did not arise from the Hitchmans’ use of the property to generate assessable rental income. The expenses are capital in nature and the Hitchmans are not able to claim a deduction for these expenses.

- - -

Repairs to a rental property will generally be deductible if:
- the property continues to be rented on an ongoing basis
- the property remains available for rental but there is a short period when the property is unoccupied - for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.

If you no longer rent the property, the cost of repairs may still be deductible provided:
- the need for the repairs is related to the period in which the property was used by you to produce income and
- the property was income producing during the income year in which you incurred the cost of repairs.

- - -

EXAMPLE
Repairs when the property is no longer rented out

After the last tenants moved out in May 2001, the Hitchmans discovered that the stove didn’t work, kitchen tiles were cracked, and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In June 2001 the Hitchmans paid for this damage to be repaired so they could sell the property.

As the tenants were no longer in the property, the Hitchmans were not using the property to produce assessable income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were also completed before the end of the income year in which the property ceased to be used to produce income.

- - -

Examples of repairs for which you can claim deductions are:
- replacing broken windows
- maintaining plumbing
- repairing electrical appliances.

Examples of improvements for which you cannot claim deductions are:
- landscaping
- insulating the house
- adding on another room.
 
Originally posted by PIppety
I suppose my argument in terms of fence "Side 1" is that although it is new it has not improved the property. (ie. I replaced a 6ft timber fence with a 6ft timer fence).

The way I see it's no different than painting a room. You may "repair" the room to it's original standard by painting it which is classed as maintenance.

All I am doing is returning the fence to it's original condition ?

Perhaps I am being a bit optimistic ?

PIppety

Hiya PIppety!

I have a number of thoughts actually . . . The first is that we live in a tax environment of self assessment, which means that you decide what you feel that you can get away with.

The second is that yes, if you have replaced only a part of the wooden fence with a dsection of new wooden fence, then you should be fine anyway to claim that part as an immediate tax deduction.

Does this help?

Dale
 
Dale,

I think so...

Would the same rules apply to the bathroom ? Replacement of the whole shower due to a leak ? As far as I am concerned there is no improvement - it might actually be worse now !!!

Situation was that the tiles needed to be removed to get to the leak and the plumber would not guarantee that the leak was fixed unless the shower screen, fittings etc were also replaced.

PIppety
 
OK so far

I think I have my mind around repair v improve.
Tell me If I am wrong but in general terms

Repair = immediate tax deduction ( keeping in mind the 12 'rule')

Improvement = no immediate tax deduction but cost (and labour?) of improvemrnt can be depreciated.

Question. Can the repair item also be depreciated? That is claim an immediate tax deduction and depreciate it each year?

Thanks
Scott
 
Re: OK so far

Originally posted by scott

Question. Can the repair item also be depreciated? That is claim an immediate tax deduction and depreciate it each year?

Thanks
Scott

Hi Scott

No, it is one or the other, and sometimes, even niether! Never both.

Dale
 
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