Renovating your investment property to create an open-plan living space can potentially increase its market value and rental appeal. But when it comes to tax deductions, can you claim the costs of removing internal walls? The answer hinges on understanding the distinction between capital works and repairs.
Under Division 43 of ITAA 1997, you can claim deductions for capital works, which include structural improvements to a property. Removing an internal wall to create an open-plan layout falls under this category, as it is a structural alteration. However, this deduction is not immediate. Instead, it's spread over 40 years at a rate of 2.5% per annum, assuming the renovation work was completed after 27 February 1992.
A common misconception is that expenses related to wall removal can be claimed as repairs or maintenance, which are deductible immediately. However, the ATO considers these costs as capital in nature since they improve the property beyond its original condition.
To see how this plays out, consider a practical example. Imagine you own a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased for $650,000. You decide to remove a non-load-bearing internal wall to create a larger living area, costing $15,000. Under Division 43, you can claim a deduction of $375 per year (2.5% of $15,000) over 40 years. At a 37% marginal tax rate, this reduces your annual tax liability by $138.75.
In our experience reviewing thousands of properties across Australia, investors often overlook the potential for capital works deductions in renovation projects. Many assume that if a renovation doesn't involve a complete rebuild, it doesn't qualify. Additionally, owners frequently miss claiming deductions for partial demolitions, such as wall removal, thinking only new constructions apply. Ensuring you have a detailed schedule of works and costs can maximise your claim.
The answer can differ depending on your situation. If your property was built before 1987 and hasn't been substantially renovated since, you may not be eligible for Division 43 deductions. Similarly, if the renovation involves structural changes that also require load-bearing modifications, additional considerations may apply. Properties owned by companies or trusts may also face different tax implications, as they do not benefit from the same CGT discount as individuals.
When planning an open-plan renovation, it's crucial to consult a Chartered Quantity Surveyor and your accountant. A QS can provide a detailed capital works deduction schedule, ensuring you maximise your tax benefits, while an accountant can ensure you're compliant with the latest tax laws.