Private ruling: Income tax - Capital allowances - Depreciation - Other
Date of advice: 26 April 2018
Published: July 2018
Ruling period: Financial year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the repairs to brickwork on your holiday rental property deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are the repairs to brickwork on your holiday rental property depreciable under division 43 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: You own a residential property which is used and currently available as a holiday rental. You acquired the property after 20 September 1985. The brick work on has cracking in three of the four walls. To repair the cracking in the brick work a fibreglass mat will be placed over the crack with a polyurethane coating which will allow for any future movement. All four walls of the property will then be cement rendered and painted (the works).

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Detailed Reasoning - Repairs: 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. Taxation Ruling TR 97/23 Income Tax: deductions for repairs (TR97/23) states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. What is a ‘repair’ for the purposes of section 25-10 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. If work done to the property goes beyond what is a ‘repair’ in terms of section 25-10, any expenditure for the work is not deductible. Taxation Ruling TR 97/23 Income tax: deductions for repairs (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 construction 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. In your case, the works go beyond a repair as envisaged by section 25-10 of the ITAA 1997. You are not merely repairing the cracks in the three walls. The works result in greater efficiency of function in the property and are considered to be an improvement and the expenditure is capital in nature. As such, the works are not an allowable deduction. | Detailed Reasoning - Capital expenses: Division 43 of the ITAA 1997 provides a deduction for certain capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997). In your case a deduction is allowed under Division 43 of the ITAA 1997 for the works carried out on the property upon completion. A deduction is only available for the number of days that a property is rented, or available for rent, in any income year from the date that the works are completed. A capital works deduction is generally claimed at a rate of 2.5% over 40 years. The works that will be carried out at your holiday rental property are considered to be capital expenses.