Is Painting a Commercial Building Considered a Capital Improvement?

In the complex realm of commercial property taxation in Australia, understanding whether painting qualifies as a capital improvement or maintenance has significant implications for tax deductions. For property owners and businesses in New South Wales, this distinction determines whether painting expenses can be claimed immediately or must be depreciated over time.

Defining Capital Improvements vs. Repairs and Maintenance

The Australian Taxation Office (ATO) makes a clear distinction between capital improvements and repairs/maintenance, which applies to commercial buildings throughout Australia, including NSW. This distinction is primarily outlined in Taxation Ruling TR 97/23.

Repairs and Maintenance

Repairs are defined as work done to fix damage or deterioration of a property, while maintenance is completed to prevent damage or deterioration of an asset[5]. These expenses are generally:

• Immediately deductible in the financial year they occur
• Related to restoring an asset to its original condition
• Not changing the character or nature of the property

Capital Improvements

Capital improvements, by contrast, are works that improve a property beyond its original state. According to TR 97/23, an improvement “provides a greater efficiency of function in the property – usually in some existing function”. Capital improvements typically:

• Must be depreciated over time (usually at 2.5% per year over 40 years)
• Enhance the property’s value, function, or extend its useful life
• May change the character or nature of the property

When Is Painting a Commercial Building Considered a Capital Improvement?

The classification of painting work depends on several factors, including scope, purpose, and outcome of the work.

Painting as a Capital Improvement

Painting a commercial building is considered a capital improvement when:

1. Complete Repainting: When you repaint an entire commercial building, either inside, outside, or both, this shifts from minor touch-up work to capital improvements work.
2. Purpose is Enhancement: If the painting is done primarily to improve the appearance and marketability of the property rather than to address wear and tear, it’s likely to be considered a capital improvement.
3. Character Change: If the painting changes the character of the building (such as dramatically altering the colour scheme or aesthetic), it may constitute a capital improvement.
4. Part of Broader Renovation: When painting is done as part of renovations or newly installed features, it’s typically classified as a capital improvement.

In these cases, the painting costs must be claimed as capital works deductions at a rate of 2.5% per year over 40 years from the date of completion.

Painting as Repairs and Maintenance

Painting a commercial building is more likely to be considered repairs and maintenance when:

1. Touch-Ups and Patch Work: If you’re doing paint touch-ups here and there, the ATO considers this a Repairs and Maintenance item, allowing 100% write-off in the financial year the expense occurred.
2. Restoration Purpose: When painting is done to restore surfaces to their original condition due to wear and tear or damage, it’s generally classified as maintenance.
3. No Enhancement: If the painting doesn’t improve the property beyond its original state but merely maintains it in good condition, it’s typically considered maintenance.
4. Same Colour/Finish: Repainting a wall the same colour as it was previously is classified as maintenance according to the ATO.

Tax Implications for Commercial Property Owners

The classification has significant tax implications:

For Capital Improvements:

• Deduction rate is typically 2.5% per year for 40 years from the date of construction.
• These are claimed under Capital Works Deductions (Division 43).
• The full amount cannot be claimed in the year the expense was incurred.

For Repairs and Maintenance:

• 100% of the cost can be claimed as an immediate tax deduction in the year the expense was incurred.
• This provides better immediate tax benefits compared to capital improvements.

Commercial-Specific Considerations

For commercial buildings specifically:

1. Tenant Improvements: If a tenant undertakes painting as part of leasehold improvements, these are still subject to the capital works deduction rate of either 2.5% or 4.0%, depending on applicable factors.
2. Industry Context: The deduction rate for capital improvements may depend on “the construction commencement date and the industry in which the building is used”.
3. Professional Valuations: For commercial properties, it may be advisable to engage a quantity surveyor to provide professional assessment of whether particular painting work constitutes maintenance or capital improvement.

In NSW and throughout Australia, painting a commercial building is not automatically classified as either maintenance or a capital improvement. Instead, it depends on the nature, scope, and purpose of the painting work.

For immediate tax benefits, commercial property owners should consider planning painting work strategically – doing touch-ups and maintaining surfaces regularly rather than complete repaints when possible. However, when full repainting is necessary or desirable for property enhancement, it should be classified appropriately as a capital improvement and depreciated according to ATO guidelines.

For complex cases, consulting with a tax professional or quantity surveyor specialising in commercial property depreciation is advisable to ensure correct classification and maximum allowable deductions.