What to do with your capital expenses, including capital works, improvements, and substantial renovations.
What are capital expenses
Capital expenses are expenses that provide long-term benefits to your property. These costs typically improve the property's value or extend its useful life. For example, installing a new roof, upgrading appliances, or adding a deck are capital expenses. They differ from regular operating expenses, like repairs and maintenance, which are typically short-term and recurring.
Capital expenses includes capital works and depreciating assets. These expenses are claimed over several years, rather than being deducted in the year they are incurred.
For a summary of the difference between repairs, maintenance and capital expenses, go to the ATO Publication Ordering Service to download Rental repairs, maintenance and capital expenditure.
Capital works
Capital works includes expenses for building the property as well as structural improvements, alterations and extensions to the property. The rate of deduction for these capital works is generally 2.5% or 4% per year, spread over a period of 40 or 25 years respectively.
You can only claim a deduction for the capital works on rental properties if the property:
was built after 17 July 1985
is rented or genuinely available for rent.
An asset that is fixed to, or otherwise part of, a building or structural improvement, will generally be a construction expense and can only be claimed as capital works.
Preliminary expenses such as architect fees, engineering fees, surveying fees, foundation excavation expenses and costs of building permits also form part of construction expenses.
Examples of capital works expenses include:
building and construction costs
alterations to a building
major renovations to a room
substantial renovations to a property
adding a fence
building extensions such as garages and patios
adding structural improvements such as a driveway or retaining wall.
You must wait until construction is complete to claim a deduction. Capital works deductions can't exceed your construction expenses.
Improvements
An improvement is anything that makes part of the property better, more valuable, more desirable or changes the character of the item that is being worked on.
Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.
Improvements include work that:
provides something new
furthers the income-producing ability or expected life of the property
goes beyond just restoring the efficient functioning of the property.
Improvements can be either capital works where it is a structural improvement or capital allowances where the item is a depreciating asset.
Substantial renovations
Substantial renovations of a rental property are where all or substantially all, of a building is removed or is replaced. This could include the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases.
For renovations to be substantial, they must directly affect most rooms in a building.
Renovations you make to a house are considered collectively, such as the:
removal and replacement of the exterior walls
removal of some internal walls
replacement of the flooring
replacement of the kitchen.
If the renovations are substantial, the property is treated as new residential premises.
Apart from the cost of replacing depreciating assets, the cost of all renovations are deductible as capital works.
The cost of replacing depreciating assets as part of substantial renovations, can be claimed as a decline in value deduction, provided the asset has been acquired as a new asset for the purpose of gaining income from rental income.
Work out your capital works deductions with the help of this ATO tool >>