SMSF trustees can claim tax on repairs to rental investment homes held within a fund provided such repairs are not classified as improvements, the ATO has stated as part of its end-of-financial-year guidance.
The regulator has pointed to its current guidance online to highlight the difference between repair, maintenance and capital expenditure in regards to a rental property and the associated tax deductions that can be made.
The guidance noted a repair was when something that is worn out, damaged or broken as a result of renting out the property is replaced, while maintenance is preventing or fixing the deterioration of an item that occurred while renting out the property. Capital expenditure is renovating or replacing an entire structure or adding a new structure to the property.
Breaking this down further, the ATO highlighted its top 10 tips to avoid taxation mistakes in relation to rental properties in the run-up to the end of the financial year.
“Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property can be claimed in full in the same year you incurred the expense,” it stated.
For example, repairing a hot water system or part of a damaged roof can be deducted from tax immediately.
“Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floorboards, are not immediately deductible, but a deduction may be claimed over a number of years as a capital works deduction,” the ATO said.
“These costs are also used to work out your capital gain or capital loss when you sell the property.”
It added that replacing an entire structure, such as a damaged roof, or renovating a bathroom are classified as improvements and cannot be deducted immediately.
“As a general rule, you can claim a capital works deduction at 2.5 per cent of the construction cost for 40 years from the date the construction was completed,” it said.
It also warned SMSFs to obtain clear evidence regarding income and expenses in order to claim entitlements.
“Capital gains tax may apply when you sell your rental property, so keep records over the period you own the property and for five years from the date you sell the property,” it said.