Private ruling: Rental property repairs
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for the expenses incurred to replace part of the roof of a commercial building held by the partners? | A1: Yes.

Relevant facts and circumstances: The partners own a large commercial property. The property was constructed many years ago, and the original roofing materials are still in existence. Partner A acquired a 50% interest in the property approximately 15 years ago. Partner B acquired the other 50% interest in the property approximately four years ago. At the time of acquisition the zincalume roof of the property was in good condition. The roof was affected by heavy rain from a storm a year ago. Since then parts of the roof have suffered regular leaks. A roofing contractor has advised that a section of the roof is required to be replaced with a heavier zincalume product and new gutters. The section of the roof to be replaced is approximately 30-35% of the total roof area. The expenditure will be incurred by the partners.

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

Reasons for decision: Summary: The expenses you incurred to replace a section of the roof of your rental property are an allowable deduction as they satisfy the requirements of 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. | Detailed Reasoning - What is a 'repair'?: The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Paragraphs 13 -16 of Taxation Ruling TR 97/23 specifically deal with the 'ordinary meaning of repairs'. 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. TR 97/23 refers to the case of W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710, in which it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. | Detailed Reasoning - Capital nature: TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: · the work is an initial repair; or · the extent of the work carried out represents a renewal or reconstruction of the entirety; or · the work results in an improvement in the property rather than a repair. | Detailed Reasoning - An initial repair: 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. There was no evidence of roof damage when you acquired the building. Therefore, the replacement of the section of roof is not an initial repair. | Detailed Reasoning - Renewal of an entirety: Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'. The item being replaced in this situation is a section of the roof of your rental property. The roof forms part of the building and would not have any separate function of its own. Therefore, you are not replacing an entirety. | Detailed Reasoning - A repair or improvement: Relevant considerations as to whether work carried out constitutes an improvement are given by TR 97/23 (paragraph 124). These are: · whether or not the thing replaced or renewed was a major and important structure of the property · whether the work performed did more than meet the need for restoration of efficiency of function, bearing in mind that 'repair' involves a restoration of a thing to a condition it formerly had without changing its character · whether the thing was replaced with a new or better one, and · whether the thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future. 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. If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement. The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10 of the ITAA 1997. If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement. You have replaced the damaged section of the roof of your property with essentially the same material as the original. Therefore the replacement is not an improvement. In your case you have incurred expenses to replace a section of the roof of your rental property that has deteriorated. We conclude that the partial replacement of the roof is not an initial repair, the replacement of an entirety, or an improvement. Hence, the replacement of the section of your roof is a 'repair' and therefore the cost is deductible under section 25-10 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.