Private ruling: Rental property expenses
Published: November 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a repairs deduction for the costs incurred on your bathrooms in your rental property? | A1: Yes.


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 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. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. 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 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, the property has been a rental property for several years. The work is not an initial repair or regarded as an entirety. The work carried out was merely to restore the bathrooms to their original state, function and appearance. The essential character of the property was not altered. The work is not regarded as an improvement and therefore considered to be a repair and not capital in nature. The expenditure incurred in relation to the repairs is considered to be an allowable deduction under section 25-10 of the ITAA 1997 in the 2013-14 financial year.

Relevant facts: You own an investment property. The property has been rented and tenanted for more than 10 years. | In the relevant year you became aware that water was escaping from the bathrooms. The property has a bathroom, toilet and ensuite. | The wet seal in both showers had failed. The tile floor in both showers needed removing and retiling. | After the tiles were removed, it was found that water had penetrated the gyprock and saturated the timber wall studs and the structural walls had perished. One of the cabinets had also been water damaged. | It was therefore necessary to remove all tiles and gyprock and re-sheet the walls and redo the wet seal and retile the floors. | The configuration of the bathrooms remained the same. | Where possible, all original fixtures and fittings were retained. However, one shower screen cracked during the work and had to be replaced. Similarly, the towel rack and shower fittings were damaged when removed and required replacement. | For the items that needed to be replaced, the replacement items were of a similar nature and cost as the damaged items. | You contained the costs to only those strictly necessary to return the bathrooms to a functional state.