Repairs vs Capital Improvements

Definition

The distinction between a repair and a capital improvement determines whether the expense is immediately deductible or must be depreciated. A repair restores something to its original condition without improving it (replacing a broken window with a like-for-like window). A capital improvement enhances the property beyond its original state or is an initial repair on a newly acquired property (replacing a broken window with double-glazing). The ATO scrutinises this distinction closely.

Claiming a $15,000 bathroom renovation as an immediate 'repair' instead of a capital improvement (depreciated over 40 years) is one of the most common ATO audit triggers. The tax difference is massive: $15,000 deduction now vs $375/year for 40 years. Getting it wrong can result in penalties and interest.

Replacing a leaking tap with the same type = repair (immediate deduction). Replacing all bathroom fixtures, re-tiling, and adding a new vanity = capital improvement (added to cost base or depreciated under Div 43).

ITAA 1997, Section 25-10

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