Private ruling: Rental property expenses
Date of advice: 25 February 2016
Published: April 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for a number of rental property repair and maintenance expenses incurred on your rental property? | A1: Yes. | Q2: Are you entitled to a deduction for improvement expenses incurred on your rental property? | A2: No.

Relevant facts and circumstances: You are the owners of a rental property. The property was leased for several years. After the end of the lease the property was left vacant for repairs. A number of repairs, maintenance and landscaping work, was carried out on the property. After the repairs and maintenance were completed, you continued to rent out the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: Repairs 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. 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. 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 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. As a result a number of items constituted as repairs and are deductible under section 25-10 of the ITAA 1997. Maintenance Some kinds of maintenance work are 'repairs' in terms of section 25-10 of the ITAA 1997, for example, painting plant or business premises to rectify existing deterioration and to prevent further deterioration. Other kinds of maintenance work, such as oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, are not 'repairs' in terms of the section. Expenditure on the latter kind of maintenance work may be an allowable deduction under section 8-1 of the ITAA 1997. As a result a number of items constituted as maintenance and are deductible under section 8-1 of the ITAA 1997. Landscaping Landscaping is considered to be an improvement and therefore not an allowable deduction under either section 8-1 or 25-10 of the ITAA 1997. Under section 43-70 of the ITAA 1997, landscaping is not included in the definition of construction expenditure and therefore a capital works deduction is not allowable either. The expense item constitutes an improvement and therefore is not an allowable deduction.