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Tax Deductions for Repair and Maintenance Expenses

Q: How do I determine if an expense is a repair or a capital improvement?

A repair restores the main function of an asset without considerably changing it, while a capital improvement substantially enhances or modifies the asset. You can deduct repairs but you claim capital improvements under depreciation or capital works provisions.

Q: Are maintenance expenses for a leased property or equipment deductible?

Yes, as long as the maintenance expense is related to the use of the property or equipment for producing business income and is not a capital expense.

By QuickBooks Australia

May 2, 2023

Understanding the nuances of tax deductions can be a key factor for effective financial management. As a small business owner, it’s important for you to be aware of all the deductions you’re entitled to, as these could make a difference to your bottom line come the end of the financial year (EOFY).

In this article, we’ll provide you with an overview of these deductions, helping you differentiate between allowable and capital expenses based on information shared by the Australian Taxation Office (ATO).

What you can claim

As long as the expenses aren't considered capital expenses, you can claim a tax deduction for costs associated with repairing, maintaining or replacing machinery, tools or premises used to generate business income. Capital expenses, which include the purchase of assets such as plant and equipment, aren't eligible for this deduction.

Examples of deductible expenses for repairs, maintenance, or replacement include:

Fixing leaks
Replacing glass in broken windows
Fixing broken fences
Repairing machines
Repairing electronics
Conditioning gutters
Maintaining plumbing

It’s important to note that repairs must restore the tools or equipment ‘efficiency of function’ without changing its character. Such as fixing defects or renewing parts, but not completely reconstructing them. To claim this deduction you are not required to be the owner of the tool that is being fixed.

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What you can’t claim

You can’t claim certain capital expenses for your business. That’s because the ATO deems them substantial improvements. Examples of these non-deductible capital expenses include:

Substantial improvements to an item or property, such as installing a new ceiling
Repairs made to machinery, tools, or property immediately after you purchase or acquire them

Claiming deductions for capital expenses

A capital expense can include the cost of establishing, replacing, or improving your business, as well as the cost of depreciating an asset. Even though capital expenses aren’t deductible as repair and maintenance expenses, you can generally claim them under a different category:

General depreciation provisions for items
Capital works provisions for property

These provisions allow you to claim deductions for capital expenses over time, as the assets depreciate or decline in value.

Understanding depreciating asset expenses

A depreciating asset refers to an asset with a finite life expectancy or effective life, which you anticipate will lose value over time as you use it. Such assets play a role in various business operations, and it's important to understand how they can impact your tax deductions.

Examples of assets that can depreciate are:

Machinery and equipment: this category includes items like EFTPOS machines and welding equipment.
Cars, utes and other motor vehicles: the ATO considers company cars and other transportation as depreciating assets.
Furniture and fittings - items such as furniture, carpet, and curtains within your business also fall under this category.
Computers and accessories - this includes computer systems, along with accessories like keyboards and mice.
Communication devices - landline phones, headsets and mobile phones are examples of depreciating assets under the communication subcategory.

These assets may either be items you previously owned personally and later introduced to your business or ones you acquired specifically for generating assessable income within your business operations.

If you claim the depreciation of capital assets under the simplified depreciation rules it is worth noting that the amount you can claim can be lower if you owned the asset for less than one year, only used it partly for business purposes or owned the asset before you started the business.

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Construction expenses

Capital works and construction that help a business produce income can also be deducted. This could include making structural improvements, earthworks, new buildings, extensions to buildings or improvements to existing buildings.

Unlike other assets, capital works are written off and depreciated over a longer period of time. As of writing in April 2023, the deduction rate can be 2.5% or 4.0% depending on the date construction began, how it’s used and the type of capital works.

How QuickBooks can help

QuickBooks allows you to track and categorise various operating expenses, helping you differentiate between deductible repairs, maintenance, and replacement expenses and capital improvements.

QuickBooks can also generate financial reports, which will help you to have a clear overview of your business's financial health. You can also lodge your business activity statements (BAS) directly through its user-friendly software. This feature allows you to prepare and e-lodge forms, helping make it easier to manage your tax obligations.

Try QuickBooks today with a free 30-day trial to see how it can help you streamline your business finances.

While every care has been taken to ensure the accuracy of the information presented as at 02 May 2023, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.

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How do I determine if an expense is a repair or a capital improvement?

Are maintenance expenses for a leased property or equipment deductible?

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Tax Deductions for Repair and Maintenance Expenses

What you can claim

Your new business toolkit

What you can’t claim

Claiming deductions for capital expenses

Understanding depreciating asset expenses

Grow Your Business with QuickBooks

Construction expenses

How QuickBooks can help

FAQs

Related Articles

Looking for something else?

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