Private ruling: Rental deductions
Published: December 2011
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to an outright deduction for replacing for 2 rows of broken wall tiles in the kitchen? | A4: 


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 43-10. | Income Tax Assessment Act 1997 subsection 40-30(1). | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Section 43-75. | Income Tax Assessment Act 1997 Section 43-85.

Reasons for decision: Summary: You are not entitled to a full deduction for the work completed on your rental property. Work such as the replacement of the damaged kitchen tiles restore the efficiency of function, do not provide any substantial improvement, and are considered repairs. However the replacement of kitchen cupboards and bench tops are considered capital expenditure and you are entitled to a deduction for capital works. Floating timber floors and the new light fittings are considered to be depreciating assets; you are entitled to a deduction for the decline in value, spread over their effective life. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all outgoings to the extent to which they are incurred in gaining or producing assessable income. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature. A deduction for expenditure incurred for repairs to property used to produce assessable income is specifically allowed under section 25-10 of the ITAA 1997. However, as with section 8-1 of the ITAA 1997, the expenses must not be capital in nature. The renewal, replacement, or reconstruction of, the whole or substantially the whole of a thing or structure (entirety) is likely to be considered a capital expense rather than a deductible repair. Determining what is an entirety is a question of fact in each case. According to Taxation Ruling TR 97/23, property is more likely to be an entirety if: The property is separately identifiable as a principal item of capital equipment The thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises The thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves The thing is a unit of property as that expression is used in the depreciation deduction provisions of the income tax law. Where, expenditure in relation to a rental property is capital in nature and therefore not allowable as an outright deduction under sections 8-1 or 25-10 of the ITAA 1997, a deduction spread over time may be available. This may be a capital works deduction under Division 43 of the ITAA 1997 or a decline in value (depreciation) deduction under Division 40 of the ITAA 1997. A capital works deduction is generally claimed at a rate of 2.5% over 40 years and is for construction expenditure in relation to a building. Expenditure on plant is specifically excluded from the capital works deduction. A decline in value deduction is claimed over the effective life of a depreciating asset (including plant) used for income producing purposes. This deduction cannot be claimed where a capital works deduction for the item is allowable (subsection 40-45(2) of the ITAA 1997). The issue of whether an item is plant is significant as it is relevant in determining whether a capital works deduction or a decline in value deduction is available. A residential rental property is almost always the setting of the landlord's rental income earning activities and not within the ordinary meaning of plant. Similarly an item that forms part of those premises is part of that setting and not within the ordinary meaning of plant. It is a question of fact and degree as to whether an item forms part of the premises. The following are relevant matters to consider when determining that question: · whether the item appears visually to retain a separate identity · the degree of permanence with which it has been attached · the incompleteness of the structure without it · the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period. | Detailed Reasoning - Repairs: Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition 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. 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. In your case, your property has been rented for 4 years, and you have had to carry out some remedial work. You have replaced 2 rows of broken wall tiles in the kitchen. As a result you have incurred expenses to restore your property to a rentable state. The above item is not considered to be capital in nature. Therefore, you are entitled to a deduction for this repair. | Detailed Reasoning - Decline in Value: You incurred expenditure on items on which you may claim a deduction for the decline in value under section 40-25 of the ITAA 1997 as they are considered to be depreciating assets. The term 'depreciating asset' is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. However, subsection 40-45(2) of the ITAA 1997 provides that Division 40 of the ITAA 1997 does not apply to capital works to the extent that an amount is or could have been deductible under Division 43 of the ITAA 1997. Subsection 40-80(2) of the ITAA 1997 provides that the decline in value of a depreciating asset will be the cost of the asset if the cost of the asset does not exceed $300 and the asset is used predominately for the production of assessable income. The following items on which you incurred expenditure on are listed in the Rental Properties Guide as depreciable assets which are eligible for a deduction for decline in value under Division 40 of the ITAA 1997. o Floating timber floor o New light fittings | Detailed Reasoning - Capital works deduction: Broadly speaking, section 43-10 of the ITAA 1997 provides a deduction for capital expenditure on capital works used to produce assessable income. Capital works include a building or an extension, alteration or improvement to a building and includes the kitchen cupboards. The kitchen cupboards are separately identifiable items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature (Lindsay v. Federal Commissioner of Taxation (1961) 106 CLR 377; [1961] HCA 93). The cupboards are fixtures and, therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The cupboards are not in place simply by their own weight but are screwed to the walls of the building and they are fixed with the intention that they shall remain there indefinitely. The deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Paragraph 43-70(2)(e) of the ITAA 1997 excludes expenditure on plant from construction expenditure. The role and function of the cupboards in relation to the income producing activities do not go beyond being part of the setting of an income producing operation when they are installed in a residential rental property. As a result, they are not plant. The expenditure on the kitchen cupboards is construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997. A deduction for the expenditure is not available under Division 40 of the ITAA 1997 because a deduction is available under Division 43 of the ITAA 1997 (see subsection 40-45(2) of the ITAA 1997). You are therefore entitled to a deduction for capital works under section 43-10 of the ITAA 1997 for the replacement of the kitchen cupboards and bench tops.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Are you entitled to an outright deduction for the replacement of the floor coverings and the kitchen cupboards? | Are you entitled to claim a decline in value deduction for the replacement floor coverings and new light fittings? | Are you entitled to a capital works deduction for the replacement kitchen cupboards? | Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | o copies of the original tax invoices and | o copy of letter detailing work carried out. | You own a rental property which has been tenanted for a number of years. | You have recently carried out some remedial work on this property. | · removal of old, damaged vinyl floor tiles in the kitchen, | · removal of old, damaged, burnt kitchen cupboards and bench tops, | · removal of 2 rows of broken wall tiles in the kitchen, | · removal of old and stained carpet from the living area and hall and | · removal of old, damaged and faulty ceiling lights from the kitchen and eating areas, living area and hall, | · installation of floating timber floor in the kitchen, living area and hall, | · installation of new cabinets and bench tops in the kitchen, | · installation of 2 rows of new tiles in the kitchen and | · installation of new and appropriate ceiling lights in the kitchen, living areas and hall.