Investors and landlords often wonder whether the construction of a retaining wall on their property can be claimed as a deductible expense. The short answer is yes, under specific conditions. Retaining wall costs are generally considered capital works and fall under Division 43 of ITAA 1997. This means these expenses can be depreciated over time, allowing you to claim a portion of the construction cost each year.
Under Division 43, capital works deductions apply to structural improvements, which include items like retaining walls. These deductions are typically spread over 40 years at a rate of 2.5% per annum. To qualify, the retaining wall must be a permanent feature and integral to the property's function or aesthetic, such as preventing soil erosion or providing essential support to the building or landscaping.
One common misconception is that all retaining walls can be claimed immediately. However, they must be capitalised and depreciated over their effective life. It's also important to note that if the retaining wall is on a residential property acquired after 7:30 pm AEST on 9 May 2017, and the wall was previously used, you cannot claim depreciation on it.
To see how this plays out, consider a 2015-built rental property in Surry Hills, Sydney, where the owner installs a new retaining wall at a cost of $20,000. As the wall is a structural improvement, it qualifies for capital works deductions under Division 43. This means the investor can claim $500 annually (2.5% of $20,000) as a tax deduction over 40 years. At a 37% marginal tax rate, this reduces the investor's tax bill by $185 in the first year.
In our experience reviewing thousands of properties across Australia, a few key patterns emerge with retaining wall claims. Firstly, investors often overlook these claims entirely, missing out on potential deductions. Secondly, incorrect classification of the expense can lead to compliance issues with the ATO. We also see investors failing to consider the impact of retaining wall improvements on their property's capital gains tax (CGT) cost base, which can affect future tax liabilities.
The answer can differ depending on your situation. For instance, if the retaining wall is constructed on a commercial property, the depreciation rules might vary slightly, and different rates could apply. Additionally, if the property is held in a self-managed superannuation fund (SMSF), specific regulations and considerations might impact the claim. Properties purchased before the 2017 budget changes are also subject to different rules regarding second-hand assets.
When dealing with retaining wall claims, it is crucial to get professional advice. A Chartered Quantity Surveyor can ensure that your deductions are maximised and compliant with the current tax laws. Working alongside an accountant will also provide a comprehensive view of how these deductions fit into your overall tax strategy.