Following a special rule in the Depreciation Act, deductions for conversion and improvement expenses may also be deducted, in so far as the total cost of conversion, improvement and maintenance does not exceed five percent of the depreciation base of the building to which the expense relates.
The conversion and improvement costs exceeding the five percent limit are depreciated with the depreciation rate applicable to the property in question. As a rule, it means that the expense is deducted from over 25 years by four per cent per year. It will therefore almost always be an advantage to take immediate deductions, if possible.
Note that it is the cost of both at-tenancy, alteration and improvement, which must be aggregated and then rebuilding and improvement expenses are deductible to the extent that the total expenditure remains below the five percent threshold. If maintenance costs it constitutes five percent, there is no room to also deduct Refurbishment and improvement expenses. Maintenance costs can always be deducted – even if they exceed the five percent limit.
It is worthwhile to plan the optimal utilization of the immediate deduction. Where appropriate, it is worthwhile to maintain this year one with full deduction and so be reluctant maintenance in year two, where one holds improvement and rebuilding costs, for maximum immediate depreciation for improvement and remodeling costs.
One of the difficulties with this set of rules is to determine when improvements and refurbishment costs are involved and when a new building is actually being built. There is only immediate deduction for improvement and conversion costs for extensions that form a natural part of the existing building. This includes a requirement that there be a physical link between the existing building and the improvement and the building with improvement functions as a whole.
A gold tank is an extension if it is connected to the operating buildings via a pipeline. A silo is an extension if road surfaces of concrete have been installed to the operating buildings, but not if a road has been built with gravel and crushed concrete.
The possibility of immediate deduction applies only to depreciable buildings (and installations) and thus not for example. Residential rental properties or offices. You cannot immediately write off ancillary equipment, i.e. Excavations, roads, courtyards, parking spaces, fences or similar.
An immediate deduction must be made in the income year in which the expense is incurred, whether the conversion or improvement has not yet been (completed) and is used commercially.
Although the expense can be deducted, regardless of the conversion, etc. Not yet occupied, it is a requirement that the (main) building, which is being rebuilt or improved, is constructed and used commercially.
It is the depreciation basis at the end of the year before the expense is held, there is a basis for calculating the five percent limit.
Obviously, if you take immediate deductions, you cannot write off the costs at the same time, nor can you immediately deduct expenses that are matched by an insurance or compensation sum.