Claiming Repair as cost base

Hi all,

hoping to seek a second opinion from accounting experts.

I paid about $14K on the repair and maintenance work on a rental property in FY22 (just painting touch up and general necessary repairs in order to keep the home in good rental condition plus replacement of an oven & shower screen). My accountant claimed about $1K from this as a depreciation in FY22. In FY23 this house was sold, $1.5k of this repair bill was claimed as depreciation for FY23. The remaining $11.5K was not added as a cost base which I felt was strange. Shouldn't the remaining unclaimed $11.5K be added as a cost base ?

Same thing was done with borrowing cost. This property's mortgage had a $395 package fee and refinance cost of $410 in FY22. The total of $805 was divided into 5(years) and $161 was claimed in FY22 & FY23 respectively. The remaining $483 balance of the borrowing cost was lost. Shouldn't it be added towards cost base ?

The house had always been a rental until it was sold.

Thanks very much

 

yes both mistakes which probably cost you money

 

yes i have a feeling these are not quite right hence have raised a complain to them.
thank you Terry for confirming. Initially I thought the 14K repair bills would be counted as deductible in FY22 but wasn't sure about the painting and replacement of oven and shower screen. Hence was OK with them being claimed as deduction.

However when the house was sold and the remaining balance of the repair bill was not included in the cost base something felt abit off.

The accountant actually did both FY22 & FY23 tax return at the same time since I was late with the tax return and didn't get it done in FY22.

May I please clarify, so generally if a repair bill was claimed as a depreciation (and not written off as a deduction in that FY) then the remaining balance of this bill can be added towards the cost base when the IP is sold ? Thanks very much

 

Here is the legislation
s110-25
INCOME TAX ASSESSMENT ACT 1997 - SECT 110.25 General rules about cost base

If you have claimed part it won't form part of the cost base but the unclaimed amount should if it was a repair

 

thank you so much Terry you are a super star I've been googling links on these regulations in order to send to my accountant about this error.

Just read thru the above link and totally felt lost and drowning as it's a jungle of info that's not specific to rental investment :O ... wishing i can find one that's specific to rental property and repair/cost base related

 

Repairs if they are NOT initial repairs may be deductible OR added to the costbase if its initial repairs. The balance of the depercaible aseets DO come off the sale proceeds (acts like adding to costbase). If they didnt do that its wrong. I would argue it mmay be worth amending the 2022 return if te repairs should have been deductible. A tax deduction has twice the benefit of a cgt costbase issue.

Borrowing expenses arent claimed over "5 years". They are claime dover 60months. The sum rarely gets divided by 5. The loan drawn down must occur in June for that to occur. Thats asign of incompletece by any tax adviser. The balance of the borrowing costs are DEDUCTIBLE against rental income when the loan is ended. BUT if there is no tenancy when the loan ends it could add to the costbase as a non-deductible 3rd element of the costbase.

 

thank you Paul,

the $14K repair bill was quite high as the house was quite old and tenants weren't great, The internal was repainted (more like touch up over the existing painting given what was actually done) and there was a few replacements such as internal doors (due to rough tenants and age of home), broken window glass, failed oven and bathroom wall tiles and shower screen due to water leak issue hence these had to be replaced as they're no longer functional. All these items had to be replaced plus a heap of other repairs & general maintenance in order to restore the home to original rentable condition, and not to improve the value. These cost were claimed as a depreciation as mentioned above: $1K in FY22 & $1.5K in FY23 respectively.

For plants and equipment such as above that were claimed as a deduction what happens when the house is sold ? Can the remaining unclaimed balance of $11.5K (14K - 1K-1.5K) be added to the cost base if they were not previously claimed as a deduction ?

It just felt abit unjust/odd when $14K was spent to repair the home to rentable condition (not improving the house) and only $2.5K was actually counted as depreciation whilst the rest is lost.

The above repairs were done in FY22, a year before the house was sold. House was purchased in 2016 so would imagine these are not initial repairs ? Can the remaining unclaimed depreciation balance of plant and equipment be counted as cost base at disposal in this case ?

 

This is the law and it applies to all capital assets. There is no law specifically for investment property

 

Hi Terry,

sorry to trouble you again, I've trawled through the contents on the link you shared above several times but can't find specifically where it states that the remaining balance of unclaimed depreciating cost can be counted as cost base.

I did raise this question with the accountant previously and she said the aforementioned 14K repair bills as it is being claimed as a depreciation if we don't keep the property for the whole 40years then the remaining balance is lost. This felt a bit unjust as this means the $11.5K spent is lost. I have raised this issue again with the head accountant of the accounting company but in case he comes back with the same response I'm hoping to be able to send him the link where it clearly states how unclaimed depreciation can/is to be counted as cost base.

Would you be able to let me know which section in particular of the above link applies to this case by any chance ?

Thanks very much. Much appreciated.

 

You would have to keep reading the following sections as there is a whole division about cost base expenses.

e.g. see
INCOME TAX ASSESSMENT ACT 1997 - SECT 110.37 Expenditure forming part of cost base or element

see subsection 1(B) in
INCOME TAX ASSESSMENT ACT 1997 - SECT 110.45 Assets acquired after 7.30 pm on 13 May 1997

 

thanks very much Terry much appreciated

 

Reading tax law isnt very enlightening unless you know all provisions.

ANY expenditure can add to the costbase. If its not deducted. Then if its governed by Div 40 and/or 43 for depreciating elements then any CLAIMED depreciation also reduces the costbase. On sale there are balancing adjustments for UNCLAIMED depreciation. Sale of depreciable assets are NOT part of a CGT sale. They arent CGT assets even though it comes with them !! . They must be excluded. eg In the example Below Fred cant make a CGT profit on a airconditioner. Its not a CGT asset. The dwelling is.

Simple example
Fred buys a house and it costs $150,000 and its an investment. He installs a airconditioning system for $15K. In year one he claims $2000 of depreciation. He sells a year later for $160K. Ignoring ALL other issues what is the CGT profit ?

Well the CGT proceeds EXCLUDE the air conditioner. Its written down value is $13000. So the sale proceeds are reduced by the Aircon unit. So that $160K sale is just $147K for CGT calculation purposes. There is no gain or loss on the air con. The CGT proceeds of $147K less costbase $150K = $3K CGT loss. If Fred didnt rent the property and it was sold and only held vacant the loss may be $5k. That is beacuse he never claimed or could claim depreciation.