Revenue vs Capital Property Expenses. How to Claim Correctly?

Should you claim that $15,000 renovation as an immediate tax deduction or add it to your cost base? Get this wrong, and you could be leaving thousands on the table – or worse, facing an ATO audit.

Picture this: You've just spent $20,000 renovating your investment property's kitchen. Your accountant suggests claiming it as an immediate deduction, giving you a nice tax refund this year. Sounds great, right? But what if that decision costs you $8,000 in additional CGT when you sell in five years?

This is the revenue vs capital dilemma that keeps property investors awake at night – and it's one of the most critical decisions you'll make for your property's tax efficiency. Get it right, and you'll optimise your tax position for decades. Get it wrong, and you'll pay the price twice: once in missed opportunities, and again when the ATO comes knocking.

Every expense you incur on your investment property falls into one of two categories:

Why This Matters More Now Than Ever

With property prices rising and rental yields tight, many investors are spending big on renovations. At the same time, with interest rates higher than they've been in years, every deduction feels important.

But here's the catch: the ATO is increasingly sophisticated in reviewing property expenses. Claiming capital items as revenue deductions is a red flag – and penalties can be severe.

Rule 1: Repairs and Maintenance

If you're fixing something that's broken or worn out, returning it to its previous condition, it's typically a revenue item.

Rule 2: Ongoing Property Management

Costs directly related to earning rental income:

• Property management fees
• Advertising for tenants
• Tenant reference checks
• Routine maintenance
• Garden & lawn care
• Pool cleaning
• Pest control

Rule 3: Operating Expenses

Regular costs of owning and renting out property:

• Council rates & land tax
• Insurance premiums
• Utilities when vacant
• Bank charges on loans
• Depreciation on fixtures & fittings

Rule 1: Improvements and Additions

Anything that adds value, changes the character, or extends the life of your property:

• Kitchen renovations
• Bathroom upgrades
• New flooring (upgrade)
• Extensions, decks, patios
• Ducted air conditioning (first install)
• Landscaping that adds permanent value

Rule 2: Initial Property Setup

Costs to get a property rentable:

• Initial cleaning
• Initial repairs to make it habitable
• Installing blinds, carpets, and fixtures
• First paint job before rental

Rule 3: Asset Acquisition

Big-ticket items that become part of the property:

• Hot water systems
• Built-in wardrobes/appliances
• Fixed floor coverings

The ATO's Tests for Revenue vs Capital

Jennifer's $30,000 Mistake

Jennifer, an Adelaide investor, spent $30,000 in her first year:

• Kitchen reno: $15,000
• Bathroom update: $8,000
• New flooring: $4,000
• Exterior painting: $3,000

She claimed all $30,000 as revenue, getting an $11,100 refund (37% tax bracket).

The ATO audited her.

$25,000 was capital, not revenue. She repaid $9,250 + penalties.

Strategic Thinking: When Capital Treatment Wins

• High-income year → Revenue treatment may be better.
• Low-income year → Add to cost base, benefit later.
• Multiple properties → If you already have capital losses, revenue deductions may be more useful.
• Long-term hold → Building a cost base can give bigger CGT savings later.

Smart Expense Classification

• Pre-expense planning: Run scenarios before you spend.
• Documentation guidance: Upload invoices & receipts under the property profile.
• Strategic modelling: Compare revenue vs capital outcomes in real time.

Renovation Planning Tools

• Project structuring to separate revenue vs capital elements.
• Document storage: Audit-ready, ATO-compliant organisation

Audit Protection

• Audit-ready reports are generated automatically.
• Digital records (photos, invoices, approvals) are linked to each property.
• Professional support if the ATO queries your claims.

Common Mistakes That Trigger ATO Attention

• Claiming major renovations as repairs.
• Treating the same expense differently across properties/years.
• Poor documentation (no quotes/photos).
• DIY tax decisions without ATO guidance.
• Bundling repairs + improvements instead of separating

Advanced Strategies: Mixed Projects

Many projects include both revenue + capital items.

Understanding revenue vs capital isn't just about this year's return — it's about building a tax-efficient property portfolio for the long haul.

The Property Accountant makes it simple:

• Capture expenses in real time.
• Classify correctly with smart system checks.
• Optimise outcomes for both annual tax and CGT.

Instead of worrying about ATO audits or missing deductions, you get a complete property tax system that keeps you compliant today and efficient tomorrow.