Private ruling: Rental property expenditure
Published: December 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the roof replacement regarded as a deductible repair? | A1: Yes.


Relevant legislative provisions: 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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that 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. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. A repair restores the efficiency of function of the property without changing its character. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. 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. As highlighted at paragraph 40 of TR 97/23, a roof is part of a building, that is, the building is the entirety. As such the replacement of the roof is not regarded as a renewal or reconstruction of the entirety. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant. A colourbond roof performs substantially the same function as the tiled roof. The materials and processes used in the repair do no more than restore the roof to an acceptable condition. Replacing a leaking tiled roof in a rental property with a colourbond roof does not materially alter the character or functionality of the rental property. Therefore the replacement of the tiled roof with a colourbond roof is not regarded as an improvement. According to paragraph 125 of the TR 97/23, a repair after acquisition of property is an 'initial repair' if the repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended. The rental property had a tiled roof when purchased more than 10 years ago. The roof began to sag causing it to leak. It is accepted that the defects in the roof emerged during the income producing use of the property after purchase. The replacement of the roof is therefore not an initial repair. We conclude that the replacement of the roof is not an initial repair, is not the replacement of an entirety, is not an improvement and is in respect of an asset used in the production of assessable income. Hence the replacement of the tiled roof with a colourbond roof is a deductible repair under section 25-10 of the ITAA 1997.

Relevant facts: You have owned an investment property and used it to earn rental income for more than 10 years. | The tiles on the roof began to sag causing it to leak which caused internal damage. | You fixed the internal damage. Your insurance refused to pay any more claims relating to water damage on the roof. | The deterioration of the roof tiles and ridge capping was such that a replacement roof was required. | The roof tiles were replaced by colour bond corrugated iron, roll top ridge and flashings. This was less expensive than replacement with roof tiles.