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Roof replacement - would it be an 'improvement' or eligible for depreciation

Discussion in 'Accounting & Tax' started by FirstTimeBuyer, 1st Feb, 2016.

  1. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    Unfortunately my IP may need its roof replaced. I'm trying to understand whether this would be categorized as an improvement to the IP (and hence not eligible as an expense or depreciation) or would it be something that could be depreciated?

    I'm not intending to change the type of material that the roof is made from. It's corrugated iron and I'm planning to have it replaced by a similar material. Would it need to be the exact same material for it not to be categorized as an 'improvement'? Just trying to cover my ground so that I can make the most of any tax deductions possible.

    Thanks
     
  2. Depreciator

    Depreciator Moderator Staff Member

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    How long have you owned the property for? If it's a recent purchase replacing the roof is going to be an 'improvement'.
    Scott
     
  3. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    It's been less than a month. So any repairs/replacement on it after purchase automatically gets categorized as an 'improvement'?
     
  4. Depreciator

    Depreciator Moderator Staff Member

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    Yep. It's called an 'initial repair'. You are making the property better than it was when you bought it, in other words you are 'improving' it.
    A repair means to restore something to the condition it was in when you started renting it out.
     
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  5. Rob G

    Rob G Well-Known Member

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    Issue 1: No, 'any repairs' after acquisition are not automatically categorised as an improvement.

    Issue 2: However, you can only deduct repairs of a non-capital nature under s.25-10 or s.8-1.

    If you acquired a property in a state of disrepair then your costs of restoration are deemed to be associated with the capital costs of acquisition. W Thomas & Co Pty Ltd v FC of T.

    Since they are capital then the only other option is capital works deductions for your roof construction over 40 years (referred to as depreciation on this forum).
     
    Last edited: 1st Feb, 2016
  6. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    So just to clarify my understanding (I think I may have had my initial understanding muddled up):
    • Initial repairs/replacement soon after a purchase is considered an 'improvement'
    • Improvements can not be deducted (written off as an expense) however part of its value can be depreciated over several years and claimed through tax that way
    Is my understanding correct? I initially thought that 'improvements' were not eligible for depreciated; hence my original title.
     
    Last edited: 1st Feb, 2016
  7. Depreciator

    Depreciator Moderator Staff Member

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    Yes, you can depreciate improvements e.g. your new roof.
    Scott
     
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  8. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    Ok thanks Scott. *phew*
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    At 2.5% per year......
     
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  10. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    Yeah I realise it's not much per year but I thought it couldn't be depreciated at all. Assuming the roof replacement costs $15,000 is it a flat 2.5% of the original replacement cost ($375) for the 40 years? Or can it be "written off" after its value dips below a threshold?
     
  11. Rob G

    Rob G Well-Known Member

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    2.5% pa for 40 years under the capital works provisions.

    There is no low value accelerated write-off because it is not "depreciation". Nor is it based upon effective life of the asset.

    It is misleading for this forum to use the term "depreciation" because mistakes will then get made between the different systems.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Depreciation and amortisation are accounting concepts and a term in common use. It seems every law rewrite or budget change gets a new description. Always referred to as simplifying.... Small business, non-business and other business with different regimes and rules. Two formula's based on a waffly thing called effective life. Luck rules are not same in medicine or we could all be in trouble.

    Even ATO confuse it....See Para 3 General depreciation rules | Australian Taxation Office where ATO refer to capital works as a different form of depreciation.
     
  13. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    Hi @Rob G, are you referring to this section from the ATO website when you're referring to 'capital works provision'?
     
  14. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I would doubt that Rob is referring to a website but more specifically to tax law. The ATO website is a generalised guide to assist and inform taxpayers and is not a concise summary of all contained in law.

    One of the best ATO guides for IP owners is the ATO Rental Guide : https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Rental-properties-2015.pdf

    It provides a very concise and relevant summary without distraction of business related issues.
     
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  15. FirstTimeBuyer

    FirstTimeBuyer Well-Known Member

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    Thanks Paul. That link's helped clarify a few things for me.