Private ruling: Rental property expenses
Published: July 2014
Ruling period: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a repairs deduction for the restoration work undertaken on your rental property? | A1: No. | Q2: Are you entitled to claim an immediate deduction for the installation of a termite barrier system? | A2: No.

Relevant facts and circumstances: In early 20XX you and your spouse purchased a rental property which was built approximately XX years ago. A building report was obtained in early 20XX, the summary states that the home had significant structural defects caused by termite damage. The areas affected by termite damage were listed as:- • structural wall frames, • timber fascia, several ceiling joists and • several walls within the home. The property was available for rent from the date of purchase and was first rented out in early 20XX. You have provided a copy of an invoice from a licenced pest controller for the installation of a chemical barrier treatment. You have made a part payment with the remainder to be paid once the work has been completed. You have provided an invoice for the builder's labour costs in the 20XX financial year for work conducted at the property. The builder has estimated that the whole job will be completed in the 20XX financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10

Reasons for decision: Summary: Section 25-10 of the Income Tax Assessment Act 1997 (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 Income tax: deductions for repairs (TR 97/23) deals with the question of what is a repair for the purposes of section 25-10 of the ITAA 1997. At paragraph 13 it states: 'The word 'repairs' has its ordinary meaning. It 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.' Repair costs are deductible where they are incurred during the period the property is held for income purposes and are attributable either to damage that occurs during the taxpayer's income use of the property or to defects that emerge suddenly during that time. Initial repairs TR 97/23 states that expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure and not deductible, if the defect, damage or deterioration existed at the time of acquisition of the property and did not arise from the operations of the person who incurs the expenditure. TR 93/23 provides an example of a rental property which was purchased with existing termite damage, paragraphs 177 to 179 states:- 'William Infelix purchases a house that was ostensibly in good repair. To make it more attractive to prospective tenants, minor repairs and renovations are undertaken. The minor repairs and renovations are initial repairs. Their cost is of a capital nature and not deductible. During the course of these repairs and renovations, William discovers that the woodwork is seriously affected by the ravages of white ants. Substantial expenditure is incurred to remedy the problems caused by the white ant infestation to restore the property to a state in which it is suitable for occupation by tenants. The expenditure incurred in these circumstances to fix the white ant problem existing at the date of purchase is also of a capital nature. It is therefore not deductible under section 25-10. The fact that William was unaware of the problem when he purchased the house, and the fact that he would have paid a lower purchase price if he had known of the need for repairs, do not alter the capital nature of the expense: Case 64 (1944) 11 TBRD (OS) 202 and the W Thomas & Co case'. In your case, it is considered that the termite damage was in existence when you purchased the property. The damage did not occur at a time you held or used the property for an income producing purpose and the work being done to rectify the structural damage made by the termites is an initial repair and the cost involved is capital expenditure. Therefore, you are not entitled to a deduction under section 25-10 of the ITAA 1997 for the building work being done on your rental property. Termite barrier Section 8-1 of the ITAA 1997 allows a deduction for all outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature. It should be noted that the cost of installing the termite barrier is not considered to be a repair and is not deductible under section 25-10 of the ITAA 1997. Whilst some pest control expenses, such as annual inspections and the annual spraying for pests are deductible under section 8-1 of the ITAA 1997 for rental properties the cost of installing a termite barrier is considered to be an improvement and capital in nature and therefore, cannot be claimed under section 8-1 of the ITAA 1997.