ATO ID 2003/795: Capital Works: remedial painting for newly acquired rental property
Date of decision: 3 June 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Does the cost of remedial painting for a newly acquired rental property constitute construction expenditure under section 43-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The cost of remedial painting for a newly acquired rental property constitutes construction expenditure under section 43-70 of the ITAA 1997.

Facts
The taxpayer purchased a residential rental property during the 2001-02 income year. At the time of acquisition, the interior painting of the property was in a state of disrepair. After settling the purchase contract, but before the property was advertised for rental, the taxpayer paid to have the whole interior of the property painted.

Reasons for decision
Summary: Broadly speaking, Division 43 of the ITAA 1997 provides a deduction for construction expenditure on capital works. Capital works generally include improvements to buildings (subsection 43-20(1) of the ITAA 1997). The taxpayer's rental property is a building to which Division 43 of the ITAA 1997 applies and the painting commissioned by the taxpayer is an improvement to that building. Construction expenditure is capital expenditure incurred in respect of the construction of capital works (subsection 43-70(1) of the ITAA 1997). Subsection 43-70(2) of the ITAA 1997 lists a number of expenditures that are excluded from the definition of construction expenditure. None of those exclusions apply in this case. Expenditure incurred in remedying defects, damage or deterioration in existence at the date of acquisition (initial repairs) is capital in nature. This means that such expenditure is not deductible under section 25-10 of the ITAA 1997. It is immaterial whether or not the taxpayer was aware of the need for the repairs at the time of acquisition or if the purchase price reflected the need for repairs (paragraphs 5 and 59-61 of Taxation Ruling TR 97/23; Law Shipping Co Ltd v Commrs of IR (1923) 12 TC 621 and W. Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; 14 ATD 78; (1965) 9 AITR 710). It follows that remedial painting of the type described here (that is, initial repairs) is qualifying construction expenditure for the purposes of Division 43 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 25-10 subsection 43-20(1) section 43-70 subsection 43-70(1) subsection 43-70(2)
Case references: Law Shipping Co Ltd v Commrs of IR (1923) 12 TC 621
Related public rulings and determinations: Taxation Ruling 97/23 | Taxation Ruling 97/25 | Taxation Determination 98/19
Subject references: Building depreciation Capital Allowances CoE Capital expenditure Deductions & expenses Initial repair expenses