Private ruling: Rental deductions
Date of advice: 24 April 2024
Published: 3 June 2024
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to an immediate deduction under section 25-10 of the Income Tax Assessment Act 1997 for works undertaken on your bathroom? | A1: No. | Q2: Are you entitled to a capital works deduction under Division 43 of the ITAA 1997 for works undertaken on your bathroom? | A2: Yes. | Q3: Are you entitled to an immediate deduction under section 25-10 of the ITAA 1997 for works undertaken on your laundry and toilet area? | A3: Yes. | Q4: Are you entitled to an immediate deduction under section 25-10 of the ITAA 1997 for works undertaken on your dining and living room and restumping? | A4: Yes.

Relevant facts and circumstances: You own an investment property (the Property). You purchased the Property several years ago. The property is currently being rented. The property was vacant for several months while work was being undertaken on the property. A pipe loosened behind the bath/shower section of the bathroom. This leak tracked, causing the floor tiles to lift and then the floor to collapse. The damage extended to the laundry and toilet section and required new tiling and flooring. The floor in the living area was levelled as it also collapsed and it wasn't safe. You had a plumber inspect the bathroom. They advised that the damage needed to be repaired so that the bathroom would meet the relevant building code. This meant that the bathroom was no longer functional and there was no other bathroom for the tenants to use. You undertook extensive works on the bathroom as evidenced by the photos provided. These works included: • removing the bathtub • retiling the walls and the floor • replacing the existing shower and bathroom vanity • removing the existing bathroom windows and replacing them Extensive plumbing works were also undertaken. You had to remove and replace damaged flooring and restump sections of the house to secure the weakened foundations. The dining area sank due to the issues with the foundations and cracked tiles. As a result, a large dip was formed which was unsafe. This area was first levelled with concrete and then floorboards were laid on top of concrete. You undertook some aesthetic renovations to the benchtops and cupboards in the kitchen. You have not made any insurance claims in relation to the damage to the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 subsection 43-25(1)

Reasons for decision: Summary: You are not entitled to an immediate deduction under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for works undertaken on your bathroom. | Detailed Reasoning - Detailed reasoning: Subsection 25-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct amounts incurred for repairs to premises or part of premises that you hold solely for the purposes of producing assessable income. Under subsection 25-10(3) of the ITAA 1997, a deduction is not allowed for repairs that are considered capital in nature. Paragraphs 36 to 42 of Taxation Ruling TR 97/23 Income tax: deductions for repairs outline that expenditure for repairs is of a capital nature where the extent of the work carried out represents a renewal or reconstruction of the entirety. Works will also be of a capital nature where they provide a greater efficiency of function in the property. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377; (1960) 12 ATD 197; (1960) 8 AITR 710). Paragraph 47of TR 97/23 provides that replacement or substantial reconstruction of an entirety as distinct from the subsidiary parts of the whole is an improvement. Application to your circumstances Following the pipe loosening in the bathroom and the subsequent leak that occurred, you completely renovated the bathroom. As a result, the work undertaken on the bathroom represents a substantial reconstruction of the entirety. Therefore, you are not entitled to claim an immediate deduction under section 25-10 of the ITAA 1997. | Detailed Reasoning - Question 2: Summary You are entitled to a capital works deduction for works undertaken on your bathroom. Detailed reasoning 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. Division 43 of the ITAA 1997 provides for a system of deducting capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. Application to your circumstances You had the leak in your bathroom inspected by a plumber. They advised that work needed to be undertaken to the bathroom to meet the relevant building code. The work that you undertook on the bathroom extended beyond what would be considered a repair. Even where work is required to meet regulatory standards, if it extends beyond what would be considered a repair, the works undertaken will be capital works. As the work undertaken is capital in nature, you can deduct capital works expenditure incurred on the bathroom at the rate of 2.5% per year. | Detailed Reasoning - Question 3: Summary You are entitled to an immediate deduction under section 25-10 of the ITAA 1997 for works undertaken to your toilet and laundry. Detailed reasoning As outlined in Question 1, subsection 25-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct amounts incurred for repairs to premises or part of premises that you hold solely for the purposes of producing assessable income. Under subsection 25-10(3) of the ITAA 1997, a deduction is not allowed for repairs that are considered capital in nature. Paragraph 15 of TR 97/23 outlines that a repair involves restoration of the efficiency of function of the property without changing its character and may include restoration to its former appearance, form, state or condition. Further, you can fairly describe works as repairs if they are done to make good damage or deterioration that has occurred by ordinary wear and tear...or by the operation of natural causes. Application to your circumstances Due to the damage caused by the water leak, you had to undertake work to the laundry and the toilet. However, the work done was not a replacement of an entirety. It merely restored the function of the laundry and toilet. As a result, you are entitled to an immediate deduction for the work done on your laundry and toilet. | Detailed Reasoning - Question 4: Summary You are entitled to an immediate deduction for the work done on your dining and living room and restumping. Detailed reasoning Dining and living room The floor in the dining and living room required relevelling as it was unsafe. The work undertaken to the flooring constituted a repair as it merely restored the efficiency and function of the floor. Restumping The partial restumping was required to remedy issues that occurred as a result of normal wear and tear. As above, the restumping merely restored the efficiency and function of the foundations of the house.