It is the single most common source of error we see in Perth rental property schedules, and the amounts involved are rarely trivial. A repair is deductible in full this year. An improvement is not deductible at all this year — it is claimed slowly, or only when you sell. Same tradesman, same invoice, same bank account, completely different tax outcome. Here is how the line is drawn.
What counts as a repair?
A repair remedies defects, damage or deterioration from your use of the property as a rental, and restores the item to its previous condition without changing its character. Patching a section of damaged plasterboard, fixing a leaking tap, repainting a wall that was already painted, replacing some broken roof tiles, mending part of a fence. The key word is restore. If the property comes back to roughly where it was, and the work relates to wear and tear that happened while it was earning income, it is generally deductible in the year you incur it.
What makes something an improvement instead?
An improvement goes beyond restoration. It makes the item better than it was, uses materially superior materials, changes the function, or replaces the whole thing rather than a part. Rebuilding a kitchen is an improvement even if the old one was worn out. Replacing a timber fence with a limestone wall is an improvement. Adding a carport, enclosing a patio, installing ducted air conditioning where none existed — all improvements. A useful test: would you describe the outcome to a prospective tenant as fixed, or as upgraded? Tax follows that instinct more closely than most people expect.
Why can't I claim repairs I did before the first tenant?
Because of the initial repairs rule, which surprises almost every new investor. Work done to fix problems that existed at the time you bought the property is capital, full stop — even if it is unmistakably repair work, and even if you do it after the tenant moves in. The logic is that the defect was reflected in what you paid, so remedying it is part of acquiring the asset rather than a cost of earning rent. Buy a property with a rotting back deck and a dead hot water system, fix both before leasing, and neither is an immediate deduction. It is not lost value, but it is deferred value, and the timing difference is significant if you were counting on the deduction this year.
How is capital work claimed?
Two separate regimes. Structural work — extensions, renovations, decks, retaining walls, a new bathroom — is claimed as a capital works deduction at a fixed annual rate over a long period, provided construction occurred after the relevant qualifying date. Separately identifiable items with a limited life, such as ovens, dishwashers, carpets, blinds and air conditioners, are depreciating assets claimed over their effective life. The distinction matters because the rates and rules differ, and because restrictions apply to second-hand depreciating assets in established residential properties acquired after the 2017 changes. Newly built or substantially renovated dwellings are treated more generously.
What happens when you sell?
Capital works deductions you have claimed reduce your cost base, which increases the capital gain on sale. This is not a reason to avoid claiming them — the deduction is worth more now than the cost base is later, particularly with the CGT discount applying to the eventual gain — but it does mean your capital gains calculation needs accurate records going back to purchase. Improvements you never claimed stay in the cost base and reduce the gain. Either way, the invoices matter, and they matter for far longer than the usual five years.
What records should you keep?
Invoices that describe the work, not just the amount. "Maintenance — $6,400" tells your accountant nothing and forces a conservative treatment. "Replace 4m section of damaged colorbond fencing, matching existing" answers the question on its face. Take before-and-after photos for anything substantial, note the date the property first became available for rent, and keep purchase and settlement documents permanently. A well-documented repair is claimed; a vaguely documented one gets capitalised because nobody can prove otherwise. The same discipline that supports your negative gearing position supports this.
Where does the borderline usually sit?
Three recurring situations. Repainting — deductible where it restores existing paintwork, capital where it is part of a wider renovation. Replacing an item because the original is no longer available in the same form, such as a modern equivalent of an obsolete fitting, which is usually still a repair if it is functionally comparable. And the single large job that mixes both, where a tradesman repairs storm damage and upgrades the kitchen in one invoice. That invoice needs splitting, and the time to ask for the split is when the quote is issued, not eleven months later.
Getting this line right shifts real money between tax years and is one of the easiest things to get wrong. The Metier Group prepares rental property schedules for Perth investors through our personal tax services. Contact us if you have work planned and want to know how it will be treated before you commit.