Repairs and maintenance is a common and necessary activity undertaken by business and property owners. The nature of the activity means that it could be regular as part of an ongoing maintenance programme, intermittent, or just a one-off. The quantum of the financial outlay can vary significantly too.
A common question is whether the costs are tax deductible in the year they are incurred (provided they are linked to an income-earning activity), or whether they result in a capital improvement, and therefore not tax deductible.
A two-stage approach is used to analyse the costs in determining the appropriate treatment.
Stage One: Identifying the relevant asset
What is the asset being repaired? Is it something that is distinct and can operate on its own, or is it a component of a wider asset? A good example is the replacement of the engine in a vehicle. The engine is not the asset, the vehicle is, thus the cost would be tax deductible.
Stage Two: Nature and extent of work done
Did the work undertaken result in the reconstruction, replacement or renewal of the asset or substantially of the whole asset? In this case the work will be capital in nature.
Was the work undertaken to repair or maintain the asset, over and above making good wear and tear and had the effect of changing the nature of the asset? This would also be capital expenditure.
Expenditure incurred to repair or maintain an asset without replacing, reconstructing, or renewing the asset, or without changing its character (i.e. restoring to its original condition) will be deductible expenditure.
For example, repainting a rental property is likely to be deductible expenditure, whereas adding on an extension to the property has clearly changed and improved the asset, and would be treated as capital.
Each case of repairs and maintenance expenditure must be analysed on its own merits and circumstances, and there is no one size fits all. The amount involved is just one of the many factors to consider. If you are undertaking repairs, then our practical advice would be to ensure you request that tradespeople or those undertaking work provide a thorough description of the work involved on their invoices. This will go a long way to assisting with our analysis and ensuring that you claim the deductions you are entitled to.