Private ruling: Rental deductions
Date of advice: 19 February 2020
Published: April 2020
Ruling period: Year ended 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Are the costs of renovating a kitchen in an investment unit fully deductible as repairs under section 25-10 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: You purchased the property before the introduction of Capital Gains Tax in Australia. This property has been held and used as a rental property to generate rental income since then. The existing kitchen, though functional, is significantly out of date and showing wear and tear from many years of use. Accordingly, you now propose to renovate this kitchen and replace materials and appliances with modern equivalents to existing materials and appliances. The renovation will include the installation of new - · Laminate bench top · Mixer and sink · Range-hood, cooktop and oven · Cabinetry · Tiled backsplash and flooring Based on your experience with a similar property you estimate that the renovation may cost approximately $X.

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. The word repair is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. FC of T (1965) 115 CLR 58 it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. Taxation Ruling 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 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 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. | Detailed Reasoning - Renovation of Kitchen: Replacing the bench top, mixer and sink as well as new appliances, cabinetry, splashback, tiling and flooring are not considered to be deductible repairs. Rather the works proposed are considered to be a renewal or reconstruction of the entirety of the kitchen. Therefore this work is regarded as capital in nature and is not regarded as normal maintenance expenditure. A deduction is therefore not allowable under section 25-10 of the ITAA 1997. | Detailed Reasoning - SMSFR 2012/1: This superannuation ruling addresses repairs and maintenance in relation to limited recourse borrowing arrangements rather than the necessarily broader matters considered in TR 97/23, which deals with general income tax legislation. Accordingly, the definitions between these two rulings will not necessarily be entirely consistent as the income tax legislation will not necessarily align completely with superannuation legislation. This ruling deals with repairs, in particular in paragraph 14 which states - Money borrowed under an LRBA may be applied not only in acquiring a single acquirable asset but also in carrying out repairs and maintenance to that asset whether necessary at the time of its acquisition or at a later time. Thus, in this ruling the reference to repairs is framed in the context of limited recourse borrowing arrangements. It is therefore considered that this ruling is not directly relevant to the question asked in this ruling and that the proper legislation for reference in this matter is income tax legislation, specifically section 25-10 of the ITAA 1997. Accordingly, the Commissioner relies upon TR 97/23 in resolving this application and the renovation costs are not deductible.