Private ruling: Rental property expenses - initial repairs
Date of advice: 3 September 2020
Published: October 2020
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you entitled to an immediate deduction for your share of the cost of work done to repair the water damaged front room and entryway? | A1: No. | Q2: Are you entitled to an immediate deduction for a portion of your share of the cost of work done to repair the water damaged front room and entryway? | A2: Yes.

Relevant facts and circumstances: You and your partner purchased a property in April 20XX. The property has always been used to produce assessable income. The house on the property was built in the 1940's. You commissioned a building report for the property before purchasing it. The report provides that there was moderate to high structural damage and major defects in the condition of the non-structural elements of construction in particular with the support timbers in the roof cavity, high moisture to foundation walls, deteriorated eaves/fascia/gables/barge board, front deck and supports on the front veranda are deteriorating and the entry foyer also had high moisture in the bricks. You decided to renovate the property X years after purchase. The tenants had not reported any damage whilst renting the property; however, during the renovation water damage to the external weatherboards, walls, roof and soffit linings in the front room and entry way was discovered. Removal of the existing materials uncovered significant structural damage to external hardwood wall framing and roof rafters. Rafters were incorrectly spaced and joined with no tie downs for wind loadings. The corrugated roof sheets had holes through it due to consistent water damage and were not screwed down correctly. The materials used were not to Australian Standards and Building codes. You were insured; however, after making enquiries with your insurer you were unable to make a claim as you could not identify a specific storm which caused the damage. There has been multiple storms in the area during your ownership of the property. You paid $X for work to repair the water damaged front room and entryway of the property. This work included the replacement of fascia, guttering, roof sheets and structural timber.

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. However, no deduction is allowable where the expenditure is of a capital nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) provides the Commissioner's view on the deductibility of repairs. A 'repair' involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. TR 97/23 uses the expression 'initial repair' to describe a repair that remedies defects, damage or deterioration of property: a) in existence when the property was acquired, and b) not arising from the operations of the taxpayer who incurs the repair expenditure. Initial repairs are capital in nature. In your case, the works done to the front room and entry way were undertaken to make good damage or deterioration which merely restored the efficiency and function of the property and did not change its character. The works are therefore correctly characterised as 'repairs'. However, the costs of repairs are fully deductible only if they involve the remedying of defects, damage or deterioration wholly attributable to the period in which the property was held by you for income producing purposes. When you purchased the property you had a building inspection carried out. The building report indicated that there was moderate to high structural damage and major defects in the condition of the non-structural elements of construction in particular with the support timbers in the roof cavity, high moisture to foundation walls, deteriorated eaves/fascia/gables/barge board, front deck and supports on the front veranda were deteriorating and the entry foyer also had high moisture in the bricks. It is apparent that the front room and entryway at the property were damaged when the property was acquired. To this end the works are initial repairs. As such, you are not entitled to an immediate deduction for your full share of the cost of the repairs. However, an initial repair expense can be dissected or apportioned to allow a deduction under section 25-10 of the ITAA 1997 for any part of the expense that remedies deterioration arising from the holding of the property for income purposes after it was acquired. In most cases it is the Commissioner's view that dissection or apportionment on a time basis is the most appropriate method of dissection or apportionment. However, in your circumstances it is considered reasonable to allow a deduction for your share of 50% of the costs to repair the front room and entryway.