Hello all,
Im back again with an interesting question.
During last financial year, I replaced a water pipe that has burst as a result of rusting. The water pipe was made of steel, and I was advised to replace it with copper (which is standard nowadays). I spent $2,500 replacing all exterior piping but none of the interior.
I am wondering whether this is considered an immediate deduction as a repair (I.e. I replaced part of the piping that has deteriorated) or whether it will be considered a capital work deduction (I.e. it sort of is a capital improvement as I technically replaced the all the external piping) . When I read section 43-10 of the Act I get a little confused and feel its more of a repair that capital work because there isn't really a pool of expenditure over a construction area – it was one day exercise.
i spoke to a tax accountant he said face value it's capital works, but you could argue it as a repair. He said maybe I should get a second opinion… Any help would be appreciated
Thanks so much!!!
Hi
Maybe this article i wrote will be help you?
http://www.washingtonbrown.com.au/property-repairs
Regards
Tyron
Thanks Tyron!
That does help, but it sways me more to a repair deduction than capital work, although my interpretation may be incorrect:
1.The work you do needs to relate to the wear and tear of the property whilst it was an income-producing asset for you. — Yes, as a result of use and deterioration, although the tenants have only been there for 2 years.. it probably would of been throughout the life of the property!
2.Repairs carried out when you initially buy a property are defined as "initial repairs" and cannot be claimed as an outright deduction. — Not an initial repair, but during the period the property has been producing income.
3.If you replace the whole item – it is not a repair. — I replaced only the exterior piping and not the inside..
4.If you improve the material when carrying out the work – it is considered a capital improvement, not a repair, and is to be depreciated. — Whilst I did replace the material from steel to copper, it isn't really considered an improvement: steel pipes were used in original construction of houses built post-war contemporary circa 1960s/1970s as they were cheaper than copper, these days all properties will use copper as a result of steel pipes generally erode. The replacement of material doesn't improve the use of the pipes in any way, it is just an industry standard now (the plumber made mention)…
I guess the intention is: If not for the fact it was broken and leaking, I would not have repaired it!
Correct me if I am wrong?
Sounds to me like you've answered your own question.
In these repairs vs. capital improvements it really can be a case by case basis and lots of grey areas.
On the face of it….i'd probably start with a repair….
If you don't start that way – you'll never be able to go back.
Thanks for the discussion! Your article was really helpful!!
Hi Flowergirl,
On the face of what you have said, it is categorically a repair and not a capital works deduction. You aren't able to replace the damaged pipe with a steel replacement these days, so replacing it with a copper pipe and claiming a deduction as a repair would be a very unlikely outcome to be challenged by the ATO.
I have quite a number of investment properties and have done the very same thing in the past. The thing about deductions and accounting interpretations is that, as Washington Brown pointed out, they are so open to various interpretations depending on who you speak with. I would definitely use the repair method claim and you will find that will be the last you hear of it. The ATO isn't particularly interested in challenging people over a $2,500 claim that can logically be argued as either a repair or a capital works deduction.
Dave Ward | Geronimo Finance
http://www.geronimofinance.com.au
Email Me | Phone MeProperty Investor, Property Investment Expert & Advisor, Finance Expert & Strategist
Sounds like capital based on the disclosed facts. 1) extent of replacement = entire external, 2) use of more durable non-rust copper to replace cast iron, 3) Possibly initial repair where the pipes were rusty or defective from the time purchased.
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