Repair Deductions - Claiming more than you pay

Major repairs by their very description often involve a lot of expense. And sometimes you can claim MORE than was spent as a tax deduction. Let me share the tips.

1. The repair must relate to the BUILDING or are structural elements eg garage, pool, etc. Examples include windows, doors, flooring, structural elements, roof etc
2. The works are not an improvement eg not an extension or new structure like a new deck. The cost relates to fixing or replacing what was already there due to deterioration.
3. The works are not strata / body corporate works. They are owner initiated
4. You have a QS report and it includes a Div 43 deduction (often described as building / structural capital allowances)
5. The property was not recently acquired meaning that the roof issue is an initial repair and cant be deductible.

How can I claim MORE than I spend ?
1. You contact the QS BEFORE commencing. This is one of those areas where a QS service is so important for follow up in later years not just when the report is issued. Thats why I like certain QS firms.
2. You ask the QS about scrapping deductions. The QS has inspected the property in the past and has likely determined a total cost for the structure and its being written off at 2.5% pa under Div 43 capital works. But its a total.
3. The QS may seek photo's or other information about what is being replaced. Lets say its the roof tiles and some timbers. They will identify the residual portion that relates to the roof as separate to the balance of the building.
4. The QS will determine the portion of the total value that remains in the roof portion and likely advise in a separate or a revised QS report what that value being replaced is. Thats a scrapping deduction. Its effective life has ended before the 40 year tax rules say it will be valueless. In some cases they may advise that none of it can be scrapped and that is usually because the roof predates Div 43. It could be a few thousand dollars
5. Then the cost for the new roof will also be deductible.

Hang on - My accountant says a new roof is a new (replacement) asset and it costs more than $300 so it must commence depreciation. Wrong. A roof is a part of the building. Its not a replacement because the building wasnt replaced. It fulfils the repair rules as the roof is a part of the building and it has defects and its replacement fixes that. A replacement must be substantially all. And then tell the idiot to read s43-40 of ITAA1997

Can I change materials and replace my tin roof with tiles ? Hmmm MAYBE. That can get complex. Seek tax advice. This issue can impact things like bathrooms. You have a leaking shower and perform a renovation at the same time as a extensive repair. It may be wise to split the costs into two quotes, two invoices that are detailed etc.

 

Thanks for highlighting this, Paul!

Let's see if I understand this correctly with an example:

House is 30 years old, and was built for $200000.00. Depreciation @2.5% would be $5000.00 p.a. Now, at 30 years old, the roof tiles have weathered badly, lost their colouring and many are cracked. So the prudent action would be to replace all the tiles before major leaks occur.

30 years ago the roof would have cost $10000.00. Now it will cost $20000.00 to replace the tiles. The roof has 10 years of depreciation life left, i.e. $250.00 p.a., and the scrapping deduction is $2500.00.

The new roof can be depreciated for the next 40 years @2.5%, i.e. $500.00 p.a. The new roof is installed on 1st July 2019.

The depreciation would look like this:

• Depreciation up to FY19: $5000.00 p.a.
  
• FY20: Scrapping deduction of $2500.00, depreciation of the rest of the house $5000.00 - $250.00 = $4750.00, depreciation of the new roof $500.00. Total deduction for FY20 = $7750.00.
• FY21 - FY30: Depreciation of $5250.00 p.a.
• FY31 onwards: Only the new roof @500.00 p.a. can be claimed as the rest of the house is now over 40 years old.

Is the above example correct?

What if the the house was PPOR at the time of the roof replacement? I guess the scrapping deduction would not be available. If the PPOR was again rented out, then the depreciation of $5250 would then be available for FY21-FY30.
Would the QS report need to say that the roof needs to be replaced?

 

Not quite. I highlighted part I dont agree with.

Tip 1 - You need a QS to assess the residual value of all the building (and the roof portion). You lack the objective data to do that. Many QS firms offer that after sale support or a slight extra charge.
The new roof may be 100% deductible not a Div 43 cost (and why I underlined the above)

Tip 2 - Have the old roof removed and installed by 30 June and you can bring forward the scrapping and potentially deductible new roof benefit a whole year. I always use a 1/3rd rule of thumb.

Scrapping $5K, New roof $20K = $25K deduction. So a enhanced refund of $8333 maybe.

If its a PPOR then thats not going to be a good thing. BUT if the work was completed before 30 June and it was a long long term rental it could.

Seek personal tax advice if its not a continually used IP.

 

A little off this exact topic but what happens with depreciation and insurance jobs. I lost an entire tile roof back in 2014. It was completely replaced like for like by the insurance company. Total cost was over $100k. I never even thought of asking accountant until I read this. Is there anything I could or should do? I already had a depreciation schedule before this. Not sure if the roof was separated out.

Thanks

 

Technically you could write off the old roof with a scrapping report and start Div 43 but not a repair cost with a QS report. BUT the problem is they cant see the old roof and its age now its gone. I have no idea how they may approach that - Discuss with the QS. They may have older photo's for example. The administrative concession for using a QS to assess cost applies to depreciation issues for the building cost but doesnt extend to tax deductible repair costs. Problem we often hear of the builder charged the insurer $100K. Take off GST. Take off margins. It will be less in most cases. Thats the QS' job to work out COST.

I have NEVER seen a QS report with elements of total construction broken down except where there are separate parts eg new garage, second story extension or improvement. It tends to be a single lump sum. Makes sense but means owners need to know when they do need it broken down at least for the element that is affected.

I see no issue with having the QS report amended back 2 years. Maybe 4 years in some cases.

 

Thanks for the response! Not planning to do this this year, but sometime in the next couple of years it's probably going to be necessary, the example was to understand how this works. The main driver is the condition of the roof and if it needs replacing before any major leaks start happening, any possible tax benefit is really just a bonus. Also doing this while tenanted might not be the best situation, it would be easier if it was done between tenants or while it is a PPOR. As this is a mixed PPOR/IP advice will be sought before doing anything Thanks!

 

Fredbear I would be considering a binding private ruling in that situation. Generally repair costs that relate to tenancy can be claimed after the tenants quit BUT must be made prior to the 30 June that follows. This is a administrative concession not stipulated in the Acts but contained in public documents such as the rental property tax guide issued by the ATO. The issue of the duration of the defects and ownership period etc may all affect the taxpayer outcome. A BPR will avoid potential penalties that could apply and provide a degree of certainty.