Private ruling: Rental property deductions - repairs
Date of advice: 21 March 2024
Published: 29 April 2024
Ruling period: Year ending 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for bathroom repairs to your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You purchased an investment property (the Property) on 4 December 20XX. In January 20XX, you hired a builder (builder 1) to renovate the interior of the Property, including a full bathroom renovation. You provided invoices and receipts for the bathroom renovation by builder 1. Builder 1 renovation was completed by March 20XX. The Property was advertised for rent and leased shortly after builder 1's renovation was completed. The Property is still rented by the same tenant. In early 20XX, your property manager reported a significant leak in the bathroom shower. You provided a copy of an Investigation Inspection Report (Inspection Report) dated DD MM 20XX. The Inspection Report found the shower leak had caused extensive water damage to the entire bathroom floor, including the wall tiles surrounding the shower, bath and lower half of the bathroom and the flooring outside the bathroom door. The Inspection Report stated the renovation work is of poor workmanship and quality and does not reflect the Australian Standards. The water proofing to the base is of a poor condition and failed. Builder 1 had gone into administration at this stage and had not purchased Domestic Building Insurance for your property. You could not claim repair costs through them or any other insurance. In MM 20XX, you hired another builder (builder 2), to repair the shower leak. The work done focused entirely on repairing the damage caused by the shower leak and restored the bathroom to its former functionality and efficiency. All original fixtures including the shower screen and frame, shower head and taps, bathtub and taps, and the vanity were preserved and reinstalled. Most of the tiles were replaced using excess tiles from the original renovation. You provided a copy of the building Contract and a copy of a quote for $XX,XXX.XX from builder 2 dated DD MM 20XX outlining the building works. Builder 2 discovered that the structural timbers under the shower were also damaged by the leak and needed to be repaired. You provided a copy of a quote for $X,XXX.XX from Builder 2 dated DD MM 20XX for extra bathroom works The total cost of the works undertaken by builder 2 amounted to more than $XX,XXX.XX. You provided before and after photos showing no modifications or improvements from the renovation by builder 1. You have not received any insurance or other type of payment for the bathroom repairs undertaken by builder 2.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision: Summary: The necessity for the repairs undertaken arose during a period when the Property was producing assessable income. The Property has been rented out by the same tenant since 20XX. Therefore, a deduction is available for repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) . | Detailed Reasoning - General deductions: Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1977), you can deduct for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are of a capital, private or domestic nature. Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. | Detailed Reasoning - The meaning of repairs: What is a 'repair' for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state, and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. If work done to property goes beyond what is a 'repair' in terms of section 25-10 of the ITAA 1997, any expenditure for the work is not deductible. The work may go beyond 'repairs' in terms of the section if it: 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. It is acknowledged in Taxation Ruling TR 97/23 Income tax: deductions for repairs explains 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. | Detailed Reasoning - Improvement or repair: When work is done to restore or fix a damaged item, we need to determine if the work undertaken is a repair or an improvement. Repairs generally restore the item to its former function and efficiency whereas improvements increase an items functionality and/or efficiency. A repair may increase the items efficiency slightly and still be classed as a repair. However, where the item's function or efficiency is improved substantially or the work changes the function of the item, the work is considered to be an improvement and capital in nature. | Detailed Reasoning - Application to your situation: In your case, you purchased a property in late 20XX, and completed renovations in early 20XX. The property has been rented since renovations were completed, from which you derive assessable rental income and incur rental expenses. In early 20XX, the property manager alerted you to a shower leak in the bathroom during an inspection. Consequently, an inspection by a professional licenced builder revealed extensive water damage due to poor workmanship from previous work undertaken by another builder in 20XX. As a result, there was no other option but to repair the bathroom floor, the floor outside the bathroom and partial walls to return the dwelling to the previous original functioning state. The works carried out focused entirely on repairing the damage caused by the shower leak and restored the bathroom to its former function and efficiency and is a deductible repair. Therefore, a deduction is allowable under section 25-10 of the ITAA 1997 .

does more than restore its efficiency of function.