Private ruling: Rental deductions
Published: June 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the cost of replacing a section of fence, a sliding glass door and the removal of trees on 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) states expenditure incurred by you for repairs to premises used by you for the purpose of producing assessable income is an allowable deduction. However, a deduction is not allowable if the expenditure is of a capital nature. Taxation Ruling TR 97/23 provides the Tax Office's view on repairs that are allowable under section 25-10 of the ITAA 1997 and 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 work results in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or · the work is an initial repair. | Detailed Reasoning - Replacement of a subsidiary part or an entirety: In the case of W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation [1966] ALR 915;115 CLR 58; (1965) 14 ATD 78; 39 ALJR 246; (1965) 9 AITR 710, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. In your case, the building itself is considered to be the entirety. The door is considered a subsidiary part of the building. As you have only replaced a door, this is considered a subsidiary part of the entire building. The same can be said for the replacement of the rear section of fence. It is not a replacement of an entirety, as the rear section is considered only part of the fence. | Detailed Reasoning - Improvement v Repair: The Commissioner accepts that the use of a different material does not necessarily prevent the work from being a repair, provided the work merely restores a previous function to the property. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant. 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. The work undertaken to replace the sliding glass door merely restores the efficiency of the previous function. The work is not an improvement and is not considered an initial repair. The use of colourbond steel for the replacement of the damaged rear fence does not constitute an improvement nor does it prevent the work from being a repair. The work undertaken merely restores functionality to the fence. The work undertaken in replacing the door and the damaged rear section of fence is considered to be a repair and you are entitled to a deduction under section 25-10 of the ITAA 1997 in the year in which the expense was incurred. | Detailed Reasoning - Tree removal: Removal of trees would only be deductible as a repair if it had already caused damage to your property and the repairs had been done in conjunction with the removal of the trees. In your case, the fence on your rental property needed replacing on two occasions and a washing line also damaged from fallen branches. As there was also potential for damage to the roof, you decided to remove the trees causing the damage. The removal of the trees might appear to be an improvement by finally solving the potential problem of falling branches. However, as the trees were causing damage during the income producing period, the expenditure incurred in felling and removing the trees does no more than remove a problem so as to put you in the same position you were in before the problem of falling branches arose. Therefore, you are entitled to a deduction for the cost of removing the trees.

Relevant facts: You have rental properties. | On the first property the rolling surface on a door had become worn, to the point that the replacement of the rollers was not feasible and the whole frame and door had to be replaced. | The property has been rented for a number of years and the door had not previously been replaced. | This was a like for like replacement. | At the other rental property three trees were dropping limbs in storms. | This had damaged the fence on two occasions and a washing line on another. | On the first occasion you repaired the fence. On the second occasion you replaced the rear section with a colourbond fence, as this was a cheaper and more robust option. | You then decided there was still a risk to the roof from the trees, so you had them removed.