Classifying repairs and improvements can be tricky enough at the best of times, but what happens when a repair and improvement occur together?
Let’s look at the following example. A rental property’s 25-year-old fence has been slightly damaged during a thunderstorm. A carpenter assesses the damage and advises that repair work will cost $7,000. However, due to a special offer, a brand new colour bond fence can be provided for $11,000. The landlord proceeds with the new fence.
Can the owner now claim the $11,000 as a repair?
In simple terms, the answer is no. This is because there is no separately identifiable repair involved.
A deduction may only be claimed to the extent that the repair can be separately identified from improvement at the same time
In summary, because repair work to the wooden fence (which would have been deductible) did not in fact occur, it is a ‘notional repair’ which cannot be deductible as part of the $11,000 capital cost of the new fence.
The owner may be able to claim the fence over a 40 years period at 2.5% per annum, but that’s a far cry from a $7,000 outright deduction they may have claimed if they only fixed part of the fence.