Are all property expenses deductible in a SMSF? Maybe not?

The ATO has identified that property is one of the top 5 investments held by SMSFs so they have provided a fact sheet on “Rental properties repairs, maintenance and capital expenditure”.

Its common that upon purchasing a property the fund needs to spend money to make the property more attractive to rent.  During this time, the repairs and improvements may not be deductible.  Trustees also need to make the determination as to whether an expense is a repair or an improvement. Does the replacement of rotted windows with longer lasting aluminium windows constitute a repair or improvement?  As a rule of thumb an improvement, improves the original state of the asset. 

The guide outlines some common types of expenses SMSFs can incur on their properties:

Repair

If you replace something that is worn out, damaged or broken because of renting out the property, it's likely to be a repair. For example, replacing part of a fence damaged in a storm or getting in a plumber to fix a leaking tap. This should be claimed at Repair and Maintenance on the rental schedule.

Maintenance

If you do work to prevent deterioration or fix existing deterioration to keep the property in a tenantable condition, it's likely to be maintenance. For example, getting faded interior walls repainted or having a deck re-oiled. This should be claimed at Repair and Maintenance on the rental schedule.

Initial repair

If you repair damage that existed when the property was bought (whether it was known about at the time of purchase or not), it's likely to be an initial repair. For example, fixing floorboards or repairing deteriorated window frames and the damage existed when the property was bought. This should be claimed in your cost base at Capital Works or Capital Allowances on the rental schedule.

Capital works

If you replace an entire structure that is partly damaged or renovate or add a new structure to the property, it's likely to be capital works. For example, replacing all the fencing, not just the damaged portion, or adding a carport. This should be claimed at Capital Works on the rental schedule.

Depreciating asset

If you install a new appliance or floor or window covering, it's likely to be a depreciating asset. For example, buying a new dishwasher or installing new carpet. This should be claimed at Capital Allowance on the rental schedule

Deductibility

Repairs and maintenance

The cost of repairs and maintenance may be deductible in full in the year you incur them if both:

• the expense directly relates to wear and tear or other damage that occurred while renting out the property
• the property either  
  • continues to be rented on an ongoing basis
  • remains available for rent, but there's a short time when the property is unoccupied (for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants).

Capital allowances

Depreciable assets are items that can be described as plant, which don't form part of the premises. These items are usually:

• separately identifiable
• not likely to be permanent and expected to be replaced within a relatively short period
• not part of the structure.

When claiming a deduction for decline in value for each asset, you can choose to use either:

• the effective life the Commissioner has determined for these types of assets
• your own reasonable estimate of its effective life.

Where you estimate an asset's effective life, you must keep records to show how you worked it out.

Initial Repairs

Costs you incur to remedy defects, damage or deterioration that existed at the time you acquired the property are capital in nature. These costs may form part of the cost base of property for capital gains tax purposes (but not generally to the extent that capital works or capital allowance deductions have been or can be claimed for them). The costs to make a property suitable to be rented out are capital in nature and not immediately deductible. To be deductible, the necessity for repairs must have been caused by the rental activity of the person making the claim, not from a previous owner.

However, if your new property was rented or made available for rent and has been affected by special circumstances beyond your control, such as a natural disaster or deliberate damage by tenants, you can claim a deduction of the cost of repairs incurred to restore the property to its original condition.

ATO example:  where initial repairs are not deductible (existing damage)

Lisa buys a property with the intention of renting it out. At the time of purchase Lisa knew that she would need to repair the roof (replace all roof tiles) and part of the ceiling as they were in a poor condition.

When carrying out the works, Lisa discovered there was extra structural damage that required her immediate attention. The repair to the ceiling costs her $2,000, the replacement of roof tiles cost her $9,000 and the structural work cost her a total of $15,000.

The 'initial' repair of the ceiling of $2,000 isn't deductible, but it may form part of her cost base for CGT purposes, the replacement of the entire roof and the structural work can be claimed as capital works expenses.

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.