In today’s bonus episode, Ben and tax expert Julia Hartman tackle one of the trickiest parts of property investment—tax claims.  

With a surprising statistic from the ATO revealing that 9 out of 10 property claims are incorrect, this episode sheds light on where investors often go wrong. 

Julia breaks down the key differences between repairs (which are deductible) and improvements (which are not), using practical examples like painting, tree removals, and kitchen upgrades.  

Plus, learn how to navigate insurance claims and why getting the details right can save you big during tax time. 

Listen to the full episode here 👉 2024: The Golden Year of Tax Planning 

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Knowing the Difference: Rental Property Repairs vs Improvements

Now that you know how to differentiate between property repairs and improvements, you’ll be able to handle your investment property tax claims better!  

For more tax planning tips, download our Free Fact Sheet and find out why 2024 is the golden year of tax planning. 

If all this talk of tax is doing your head in and you’re looking for an investment-savvy tax accountant who can help, head on over to www.thepropertycouch.com.au/tax.  

If You Enjoyed TPC Gold | Repairs vs. Improvements: What Every Property Investor Should Know, You Might Also Like:

• Ep 349 | How to Avoid Paying Tax Without Going to Prison! 
• Ep 434 | “It Is a Minefield”: Unboxing Tax Structures and Myths 
• Ep 502| “It’s Putting the Mouse in Charge of the Cheese!”: Death, Taxes & Inheritance 

Transcript

Ben Kingsley
Now, there’s a lot of misconception (around this) and something that the ATO released talked about (how) 9 out of 10 investment property claims are incorrect. And I think a lot of it has to do potentially with how we treat money that we spend on the property. I think a lot of investors just think that “I’m running a small business” so anything that I spend on that property has some form of tax deductibility for me, but it’s not always the case. There is definitely a distinction between improvements and repairs. And so can you just share with us why that distinction is so important in terms of whether it’s claimable or not claimable, Julia?  

Julia Hartman
Yes, well you shocked me when you said 9 out of 10 because we certainly don’t experience that.  

Ben Kingsley
No, it surprised me too.  

Julia Hartman
So the only thing I can think of where it’s a bit of a gray area and inexperience might make people vulnerable, is sorting out the repairs from the improvements from the replacements in its entirety. As you know, we have a particular worksheet that eliminates that. But if in some cases they may bring in to their accountant the whole bundle of receipts and say, yeah, I did the repairs, here you are. And they might just be put in. Or some people prepare a spreadsheet for their accountant and just list it as repairs. They say: That’s it, you know, trust me. So I can’t imagine anything other than that, but somewhere in there, the ATO is finding one little receipt or one receipt’s gone missing.  

But anyway, to explain the difference. So a repair, for most people…and this is the classic one, people say, “Oh but it needed repairing to bring it back to what it was when it was brand new”. But that’s not a repair. It’s only when you bring it up back to the condition it was in when you bought it. So if it needed painting when you bought it, that’s an improvement if you paint. So you can’t claim that as a tax deduction. Just pop that in your depreciation schedule and write it off over 40 years.  

But anyway, so did it improve the property beyond what condition it was in when you bought it? Then no, you don’t get a tax deduction for the thing. Now, if it was your home before…when you bought it and then later it needed painting but you went and rented it out for a couple of years and finally you painted it, well, just because it became necessary to do the painting in the year you lived there, it doesn’t matter. You owned it before it became necessary to paint it. So as long as it’s rented the whole year you paint it, you get the deduction for that painting.  

Okay, another thing is to use materials that are better than what was originally there, such as replacing a tin roof with tiles and stuff like that. But you are allowed to use (that) you wouldn’t go try to find old copper pipes instead of using PVC or something like that. You are allowed to use modern materials; you can’t improve it too much beyond that…just what the modern equivalent is. 

So the next one is another example of a tree; removing a tree. That’s a good example of a repair, isn’t it? So why are you removing it? If you are removing it because the leaves are clogging up the gutters, then no. It’s an improvement if the leaves have always clogged up the gutters, you’re improving it by removing the tree. If during the time of ownership, the roots got into the pipes, then you’re removing it as a repair. But if the roots were already in the pipes before you bought it, it’s an improvement to remove the tree.  

And so it goes on okay. But there’s some weird stories. And these are ATO rulings where they’ve said to remove the carpets and polish the existing floorboards was considered a deductible repair. Yet underpinning due to subsidence was considered an improvement. Yeah, go figure.  

Ben Kingsley
I’ll probably come back to what the house subsiding before you bought it and hence that continuation. The other one that’s also really important that you also like to share is the one about some part of the original component or structure being left behind. Can you talk to that story?  

Julia Hartman
Right, well, this is the issue about replacement in its entirety. So we’ve got to make sure it’s a repair, not an improvement, and it’s not a replacement in its entirety. So to replace something in its entirety. Yes, there’s nothing left of the original. You’ve got to have the original still there to have to repair it. So the walls of the house are part of the entirety of the building. So if you replace the whole roof, that’s all right. That’s a repair, assuming everything else. It’s not a replacement in its entirety because there’s no way that roof could exist without the walls to hold it up. Okay.  

Ben Kingsley
Makes sense.  

Julia Hartman
So the house is the entirety. But kitchen; the kitchen is an entirety in itself. You replace the whole kitchen, then it’s not a repair. And if you took the cupboard doors off the kitchen and put modern ones on, that’s a repair. You like that one, don’t you?  

Ben Kingsley
No, I do like those because I’ve seen both done and I’ve got a situation with one particular property at the moment where we’ve had a lot of hidden water get into the back and it’s rotted the sort of back parts of the frame and the cabinetry in the kitchen. So we’re going to have to obviously do an insurance claim and potentially to make it safe and for quiet enjoyment, we’re probably gonna have to rip the kitchen out and put a whole new kitchen in as an example because of that water damage that’s sort of been hidden from eyesight. But that’s an example where it’s obviously…I’m changing the whole kitchen unit. Is that a repair or a replacement because I’ve had water damage in that property?  

Julia Hartman
Well, you’re going to get an insurance claim you told me.  

Ben Kingsley
Yes, we’re hoping to get an insurance cut.  

Julia Hartman
So you’re going to undertake the repair.  

Ben Kingsley
That’s right. We’re not paying for it. It’s not a cost.  

Julia Hartman
Yeah. Well, that’s the trouble. If you’re replacing the whole kitchen, the insurance company is going to be paying for it. Get the insurance company to pay for the replacement. Don’t give you the cash because then you’ve got the problem. Right. So you don’t have to split hairs over this, just say to the insurance company: Go right ahead, get your tradies in, do what you’re going to do.  

Ben Kingsley
Yeap. 

Julia Hartman
Right. But also if you’re not going to do all of the repairs, you get the cash from the insurance company. And if they are repairs, like you’re saying about the boards at the back and that, that you’ve got to replace you say, I’ll claim a deduction of $10,000 for doing that. I’ve got $40,000 from the insurance company. I have to include as income only $10,000 to offset that because it’s recouped. The other $30,000 that I haven’t spent just comes off my cost base. So basically you’ve got the money sitting in your favourite place, the offset account instead.  

Ben Kingsley
Very nice. And in terms of the interest excess, sorry, the insurance excess, is that deductible if I have to pay an excess?  

Julia Hartman
Yes, if they’re going to replace it, you’d have to pay it. But when it comes to an insurance payout, they normally reduce what they give you by that. But yes, going back to the idea of getting them to replace the kitchen, yes, you would deduct the excess.  

Ben Kingsley
Okay, so a couple of ideas there that we’ve seen come out. Hope you liked that short TPC Gold, folks. I’ve always enjoyed chatting with Julia. By the way, the tax return deadline is 31st October, so get on it ASAP. If you have a refund, best to do your tax return soon, so any refunds can go straight into your offset account. But if you choose to engage a registered tax agent, you may be eligible for an extended tax return deadline. If you’re looking for one, go to www.thepropertycouch.com.au/tax. And of course, anything we’ve said on this podcast is general information only. But until next week…knowledge is empowering, but only if you act on it.