Are You Treating Your Property Expenses Correctly According to TR 97/23? Is it a Repair, Improvement, or Initial Repair?

When managing property expenses, distinguishing between repairs, improvements, and initial repairs is crucial to ensure you're claiming the right deductions. Misclassifying these expenses can lead to missed tax opportunities or potential issues with the ATO. So, are you handling your property expenses correctly according to Taxation Ruling TR 97/23? Let’s dive into what you need to know.

Understanding TR 97/23: The Basics of Repairs, Improvements, and Initial Repairs

1. Repairs (Deductible as Operating Expenses) Repairs are all about maintaining the asset in its original condition by fixing defects, damage, or wear and tear. These actions do not change the character of the asset but simply restore it. For example, replacing broken tiles or repainting walls are classified as repairs. These costs are typically deductible in the year they are incurred, providing immediate tax relief.

2. Improvements (Capital Expenses, Not Immediately Deductible) Improvements go beyond just restoring the asset—they upgrade, enhance, or alter it. If the work done significantly boosts the asset’s value, efficiency, or function, it’s considered an improvement. Think of things like modernizing a kitchen, installing a new air conditioning system, or adding an extension. These expenses are capital in nature and are generally not immediately deductible but can be claimed over time through depreciation.

3. Initial Repairs (Capital Expenses, Not Deductible as Repairs) Initial repairs are those required to fix issues present at the time of acquisition. Even minor work done to make an asset functional or fit for use falls into this category if it addresses pre-existing problems. For instance, if you purchase a rental property with a leaky roof and fix it soon after purchase, this is considered an initial repair—not a deductible repair. These costs are treated as capital expenses and added to the cost base of the asset, eligible for depreciation over time.

How to Correctly Classify Your Property Expenses

• Repairs: Focus on restoring the asset without altering its nature. These are deductible as operating expenses.
• Improvements: Upgrades or enhancements that increase the asset’s value must be capitalized and depreciated.
• Initial Repairs: Fixes that address pre-existing conditions at the time of acquisition are treated as capital costs and depreciated accordingly.

Why This Matters to You: Incorrectly classifying property expenses can lead to compliance issues and financial setbacks. By understanding and applying TR 97/23 correctly, you ensure that your claims are accurate and that you're maximizing your allowable deductions. Always consult with your quantity surveyors or tax advisors to review your expenses and apply the right treatment.

Take Action Today! Are you confident that your property expenses are correctly classified? Don’t leave it to chance! Schedule a consultation with our expert team today to review your property expenses and ensure you’re compliant with TR 97/23. Click here https://calendly.com/patrick-chu-i8o/one-to-one-meeting to book your appointment or contact us at [email protected] to get started. Let us help you optimize your deductions and keep your tax strategy on the right track!