Repairs, Maintenance, or Capital Improvements: Understanding the Difference for Tax Deductions

For commercial property investors, distinguishing between repairs, maintenance, and capital improvements is essential for tax purposes. While each can be deductible, they’re treated differently under tax law. For instance, capital improvements must be depreciated over time using a detailed depreciation schedule, while repairs and maintenance can typically be claimed immediately in the year they’re incurred.

Here, we’ll clarify these categories to help you meet ATO requirements and capture all eligible deductions.

Understanding the Difference: Capital Improvements, Repairs, and Maintenance

Correctly classifying each type of expense is critical to maximize deductions. Here’s a breakdown:

• Repairs: Fixes that restore the property or asset to its original condition.
• Maintenance: Ongoing work to keep the property in good condition or prevent deterioration.
• Capital Improvements: Upgrades or changes that increase the property’s value or extend its useful life.

Below are examples of each type, along with guidelines on how to claim them.

What Qualifies as a Repair?

Repairs are minor fixes needed due to general wear and tear. They’re immediately deductible in the year the expense is incurred.

Examples of Repairs:

• Replacing damaged ceiling tiles
• Fixing cracked windows
• Patching minor wall damage
• Repairing a leaking faucet in the restroom

These costs can be fully claimed in the same tax year the repair was made.

What Qualifies as Maintenance?

Maintenance expenses involve ongoing upkeep that prevents the property from deteriorating and ensures it remains in suitable condition for tenants. Like repairs, maintenance expenses are deductible in the year they’re incurred.

Examples of Maintenance:

• Repainting walls with marks or minor damage
• Routine air conditioning servicing
• Common area cleaning
• Pest control

These expenses are claimable for income-producing commercial properties, whether owned or tenanted.

What is a Capital Improvement?

Capital improvements are upgrades that enhance the property’s value, extend its useful life, or take it beyond its original condition. These expenses are not fully claimable in a single year; they must be depreciated over time.

Examples of Capital Improvements:

• Installing a new HVAC system
• Renovating or adding office spaces
• Building additional meeting rooms or partitions
• Upgrading flooring throughout the property

Example: A new office roof installed at $50,000 with a 40-year effective life will depreciate at 2.5% annually.

Types of Depreciation Deductions: Division 43 and Division 40

Capital improvements fall under two main categories for depreciation:

1. Division 40 – Plant and Equipment Depreciation
2. Division 43 – Capital Works Deductions

A professional depreciation schedule from TDQS - Tax Depreciation & Quantity Surveyors can identify and calculate deductions for both Division 40 and Division 43 assets, ensuring full compliance with ATO standards.

Commercial property owners and tenants may both claim deductions on improvements, with the depreciating assets differing slightly from residential properties. Commercial investors are eligible to claim depreciation on both the light fittings and joinery as individual plant and equipment assets.

Fit-outs and renovations—often necessary for commercial spaces such as offices, restaurants, and retail shops may qualify for accelerated deductions or tax benefit such as instant asset write-off. A professionally prepared commercial depreciation schedule from TDQS - Tax Depreciation & Quantity Surveyors will capture every available deduction, including scrapping costs for assets removed during renovations.

Taking full advantage of tax deductions requires a clear understanding of the distinctions between repairs, maintenance, and capital improvements. For a detailed, ATO-compliant depreciation schedule, contact TDQS - Tax Depreciation & Quantity Surveyors at 02 5502 5500. Our expert team is here to help you maximize every eligible deduction and enhance your property’s cash flow for years to come.