Private ruling: Rental Property - deductions
Date of advice: 27 April 2018
Published: July 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim a capital works deduction for the payment made to x for $x for work commenced by x but not completed? | A1: Yes | Q2: Are you entitled to claim capital works deductions for the expenses incurred on the renovation of your bathroom, laundry and kitchen? | A2: Yes

Relevant facts and circumstances: You are the sole owner of a rental property. You first rented it on x at market rate. An inspection of the property revealed that the tenant had damaged the property. The tenant vacated the property on x. You engaged contractor x to repair the damage, and at the same time renovate some aspects of the property. You paid x instalments. x did a couple of days work, demolishing the bathroom, kitchen and laundry and then left without completing the job. You made an application to the X Tribunal who issued an order to x to refund you the money you paid them. To date x has not repaid you. You then engaged contractor x to complete the work. You provided an itemisation of the work carried out by x.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) Division 43

Reasons for decision: Summary: The items under questions one and two are separately identifiable capital items with their own function to the building. Therefore, they can be claimed as Capital works deduction. | Detailed Reasoning - Detailed reasoning: Division 43 of the ITAA 1997 relates to deduction of certain capital expenditure on assessable income producing buildings and other capital works. It sets out the rules for working out those deductions TR 97/23 states that a property is more likely to be an entirety if: (a) the property is separately identifiable as a principal item of capital equipment; or (b) 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; or (c) the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or (d) the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law (paragraph 38 of TR 97/23). A property is more likely to be a subsidiary part rather than an entirety if: (a) it is an integral part of some larger item of plant; or (b) the property is physically, commercially and functionally an inseparable part of something else (paragraph 39 of TR 97/23). In your case, the kitchen cupboards, laundry and bathroom are separately identifiable capital items with their own function and are, therefore, an entirety in themselves. Their renovation is a renewal of an entirety and the expenditure is Capital in nature deductible under Division 43 of the ITAA 1997.