Operating Expenses
These are the day-to-day costs incurred to maintain and manage your investment property. They are fully deductible in the year incurred, provided the property is rented or available for rent. Typical operating expenses include:
- Advertising for tenants
- Council rates, utilities, and insurance premiums
- Repairs and maintenance (e.g. fixing a leaky tap or repainting)
- Property management fees
- Loan interest on the investment portion of your mortgage
Example
 If you spend $2,000 on minor repairs and $1,200 on insurance in a year, you can claim the full $3,200 as an immediate deduction, reducing your taxable rental income.
Plant & Equipment (Depreciating Assets)
These are removable or replaceable items inside your property, such as appliances, furniture, and fittings. Rather than deducting the full purchase cost in one year, you claim a depreciation deduction spread over the asset’s effective life as determined by the ATO (Learn more in Lesson 5).
Example
Purchasing a new oven for $1,500 might be depreciated over 10 years, allowing you to claim about $150 per year rather than the entire cost upfront.
Capital Expenses (Improvements & Capital works)
These are one-off, significant expenditures that add value to the property or extend its useful life—such as major renovations or structural improvements.Â
Unlike operating expenses, capital expenses are not immediately deductible. Instead, you either claim a capital works deduction (typically at a rate of 2.5% per year over 40 years) or add them to the property’s cost base for calculating capital gains tax when you sell (Learn more in Lesson 5).
Example
A $20,000 kitchen renovation is treated as a capital expense. Rather than deducting $20,000 in the year of the improvement, you might claim about $500 annually under capital works deductions. Similarly, if you replace an entire roof, the cost is depreciated over the useful life of the structure rather than deducted immediately.
Why Proper Classification Matters
- Immediate vs. Deferred Benefits: Operating expenses reduce taxable income in the current year, while plant & equipment and capital expenses offer tax benefits over time.
- ATO Compliance: Correct classification ensures you claim only the deductions you’re entitled to and helps avoid issues if your return is reviewed.
- Accurate Investment Analysis: Understanding which costs are immediately deductible versus those that are spread out over years allows you to better assess the true running costs and long-term benefits of your investment property.
By categorising expenses correctly, you maximise your tax benefits and ensure compliance with ATO guidelines. This detailed approach helps you track deductions over the years and, when selling, correctly adjust your cost base for any capital gains tax calculations.
This content is based on information obtained from sources believed to be reliable and accurate at the time of publication, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no ongoing obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice, and do not constitute financial product advice.
We do not provide tax agent services. The information provided in this article should not be relied upon to satisfy liabilities or obligations that arise, or could arise, under a taxation law or to claim entitlements that arise, or could arise, under a taxation law. You should seek professional tax advice to understand your tax liabilities, obligations and entitlements.Â
