Private ruling: Rental property repairs
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for your share of the cost of work undertaken to replace the tiled roof of your co-owned rental property with metal sheeting? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident. You co-own a rental property. You have co-owned the rental property for more than five years. The quote provided by the builder states that the existing roof pitch is too flat for the tiles which are fitted. Over time, wind driven rain has been blown under the tiles which then runs over the back of the tiles and onto the sarking which has then started to deteriorate. The sarking is the only thing preventing additional leaking occurring over the rest of the house and further inspection found the sarking to be in a poor condition over most of the roof area. The builder stated that the only permanent way to remedy the leaking is to re-roof using metal roof sheeting.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10.

Reasons for decision: Summary: The work undertaken to replace the roof of your rental property merely restored, rather than enhanced the functionality of the property. You are entitled to a deduction for your share of the cost of replacing the roof of your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Taxation Ruling TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: · the extent of the work carried out represents a renewal or reconstruction of the entirety, or · the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or · the work is an initial repair. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Taxation Ruling TR 97/23 states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. | Detailed Reasoning - Repair is distinct from renewal or replacement: Renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital improvement rather than a deductible repair. In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 14 ATD 78; (1965) 115 CLR 58, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of a building, such as a roof or wall is considered to be a subsidiary part rather than the entirety. | Detailed Reasoning - Improvement or repair: TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. For example, in Case 51 (1960) 9 CTBR (NS) 328, it was held that the replacement of a galvanised iron roof with concrete roof tiles was a repair as it did little more than meet a need for restoration. The material in question was designed to perform substantially the same function as that which it replaced. Also, if the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part . That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property. | Detailed Reasoning - Your situation: In your case, the removal and replacement of the damaged roof is not considered an initial repair or a renewal or reconstruction of the entirety. It is accepted the use of metal sheeting to replace the tiled roof constitutes a repair as the change in material did not improve the efficiency or function of the property. That is, the work undertaken on the roof merely restored, rather than enhanced the functionality of the property. Therefore, you are entitled to a deduction for your share of the cost of replacing the roof of your rental property under section 25-10 of the ITAA 1997.

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