Private ruling: Rental property deductions - repairs vs capital works
Date of advice: 13 October 2020
Published: December 2020
Ruling period: Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2019

Ruling: Q1: Can you claim $XXXX you have incurred to repair the deck as a deduction immediately against rental income received in the 2019-2020 income tax year? | A1: Yes | Q2: Can you claim the amount of $XXXX once the deck is completed (and payment has been made) as a deduction against rental income received in the 2020-21 income tax year? | A2: Yes

Relevant facts and circumstances: You own a property (The Property). You purchased the Property in 20XX. Your relative started renting The Property from 20XX. The amount of rent they pay each week is $XXX. This is slightly below the average market rent per week in your postcode. Your home has several small bedrooms and a small total overall area. Prior to your relative renting The Property, you identified there was a part of the Property that required some work. There was a patch in the corner of the main walking area which needed repair for some time, but you delayed it because it was in a corner, not the main walking area. Later you put your foot through a rotting board when moving out and then acted to commence work on the decking. At the time you purchased The Property, the decking was in good condition. It has deteriorated over time, however, as it is not undercover. The initial work required was to replace existing rotting boards. However, once the carpenter began investigating crossbeams, he concluded that more boards needed replacing. You intended to fix the deck before your relative started renting the property. This did not occur. The timber boards were replaced with a different product that gives the appearance of timber decking. In XXXX, you received a quote from a carpenter for work required on the deck. Work commenced several months later. The initial quote was for $XXXX. This quote was provided before the full extent of works required was known. You have paid a deposit of $XXXX. You received an invoice for a total amount of $XXXX in XXXX. As you had paid an initial payment of $XXXX, the remaining amount for payment is $XXXX. The remaining balance will be paid once the repair work has been completed.

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

Reasons for decision: Summary: A deduction is allowed for the repair of the decking under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. In appropriate circumstances, expenditure can qualify as a deduction for repairs even though the Property was previously used for a non-income-producing purpose. This is providing the expenditure incurred is not of a capital nature. In your situation, you have owned The Property since 20XX. You first noticed that the decking needed work some time before renting the property out. You initially intended for the rotting boards to be replaced only. However, once the carpenter began inspecting the deck, it was ascertained that further work was required. The wooden decking was replaced with a different material. However, although there may be a slight improvement over the original material, the function of the deck remains the same. The work undertaken was to restore the efficiency of the function of the deck and did not change the character of the deck. Therefore, the use of different material still constitutes a repair and not an improvement. Where something is replaced in its entirety, a deduction is not available for repair. The definition of an entirety has been discussed in various cases. One definition provides that where a thing is a subsidiary part (for example a staircase) but not the whole of a thing (house here for example), it will not constitute repair of an entirety. In this situation, only part of the deck was repaired. Therefore, a deduction is allowed for repair of the deck. | Detailed Reasoning - Non-arm's length issues: You are renting your property to your relative at below the market value amount, this is known as non-arm's length. In accordance with Taxation Ruling IT 2167 Income Tax: rental properties you may only claim deductions up to the amount of rent received. In your case, you receive $XXX in income per week and the amount you are claiming is $XXXX for work carried out on the deck over the two income tax years. Therefore, you are eligible for a deduction of $XXXX, as this is less than the rental income received during the relevant periods. For further information on non-arm's length dealings and rental income please refer to the ATO website and in particular search QC62602. | Detailed Reasoning - In summary: You can claim $XXXX in the 2019 -2020 income year as an immediate deduction for repair of the decking and the balance of $XXXX once paid in the 2020-2021 income year.