Private ruling: Rental property - repair
Date of advice: 4 August 2017
Published: November 2017
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a deduction for the cost of removing the damaged asbestos roof on your rental property and replacing it with a colorbond roof? | A1: Yes.

Relevant facts and circumstances: You have owned a rental property of an extended period of time. The asbestos roof on the property was in good to fair condition when the property was acquired. The property has existing tenants and has always been rented or available for rent. The roof is approximately 45 year old and due to wear and tear is starting to deteriorate and become friable. The roof is now leaking and has become a health hazard for both your tenants and neighbours. You have received several quotes and have been advised by all roofing contractors that they are unable to repair asbestos sheeting and that the only way to fix the problem is to replace the entire roof with an equivalent material being colorbond as the original roof material is no longer available.

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, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs, 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. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. TR 97/23 states that 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. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201), 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’. In your case, your rental property roof had deteriorated and is leaking in a number of places. It is accepted the use of colorbond to replace the asbestos roofing constitutes a repair as the change in material will not improve the efficiency or function of the property. The roof will merely be repaired by its modern equivalent which restores the original function. Therefore, you are entitled to a deduction for the cost of replacing the roof of your rental property under section 25-10 of the ITAA 1997.