Private ruling: Rental property expenses
Published: June 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a repairs deduction for the following costs incurred on your rental property? · lead flashing to right hand side of front roof · downpipe to front of property · side gate · man holes · replace flooring cut away for access · polishing pine floors in living area · packing existing bearers and joints · fixing skirting · replace rotted window in family room and window sills · patching walls and ceilings · fix existing attic ladder cover · new rear fence · painting · silicone seal wall tile junctions and laundry tub · replace broken glass in bathroom · rubbish skip and rubbish removal · cleaning | A1: Yes. | Q2: Are you entitled to a repairs deduction for the other work carried out on your rental property? | A2: No. | Q3: Are you entitled to claim a capital works deduction for the following expenditure incurred on your rental property: · new kitchen and bathroom work · remove existing kitchen external door and seal off with new brickwork, · new mirrored build in wardrobe in main bedroom · plumbing and electrical · new brick walls and work · new windows and doors · French doors · new wall vents · new toilet and cistern · vanity and basin · bath panels, towel rails, toilet roll holder, soap dish, hand towel holder, glass mirror · rerun gas pipe · power supply and power points and telephone points · clothesline · new light fittings hardwired? | A3: Yes. | Q4: Are you entitled to a deduction for demolishing the existing kitchen and bathroom on your rental property? | A4: No. | Q5: Are you entitled to a deduction for the decline in value for the following items: · bench oven, hotplates and range hood · dishwasher · blinds · carpets and · extractor fan · smoke detector · removable light shades? | A5: Yes. | Q6: Are you entitled to a deduction for the portion of the costs in taking your case to the relevant consumer tribunal that relate to repairs and lost rent? | A6: Yes. | Q7: Is a portion of your costs in taking your case to the relevant consumer tribunal included in your capital works deduction? | A7: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43 Reasons for decision | 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, to the extent that the expenditure is not capital in nature. | Taxation Ruling TR 97/23 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. 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, 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. | Capital works | Division 43 of the ITAA 1997 provides a deduction for 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). | Kitchen and bathroom and capital works | The kitchen and bathroom are separately identifiable capital items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature and not a deductible repair ( Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under Division 43 of the ITAA 1997. | The costs of the new kitchen and bathroom are also regarded as an improvement and therefore capital in nature. Therefore the expenses in relation to the new kitchen and bathroom fit out including the costs of the new bench tops, flooring, cupboards, tiles, window, shower, toilet, vanity and associated plumbing and lighting and not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997. | Similarly, the French doors, brick work, wall vents, power supplies, power points, telephone points, hardwiring of lights, clothesline and built in wardrobes are fixed to the walls and are considered to be part of the building. A capital works deduction is allowed for this expenditure. | Painting, cleaning, fence and repairs | The painting, cleaning, rubbish removal, patching and work done to the flashing, downpipe, side gate, man holes, floor access repair, polishing floors, bearers and joints, skirting, rotted window and sills, attic ladder cover, rear fence, silicone seals, broken glass are considered to be deductible repairs. That is, this work is not regarded as capital in nature and is regarded as normal maintenance expenditure. Therefore a deduction is allowable under section 25-10 of the ITAA 1997. | Demolishing costs | Demolishing work is capital in nature and not a repair. Therefore no deduction is allowable under section 25-10 of the ITAA 1997. | Subsection 43-70(2) of the ITAA 1997 excludes certain expenditure from 'construction expenditure'. Expenditure on demolishing existing structures is so excluded (paragraph 43-70(2)(b) of the ITAA 1997). Therefore no deduction is allowable under Division 43 of the ITAA 1997 for the associated costs. | No other provision is relevant in relation to the demolishing costs, therefore no deduction is allowable. | Depreciating assets | Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. | Light shades, oven, hotplates, range hood, dishwasher, extractor fan, smoke detector, blinds and carpets are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes. | Please note these items are regarded as capital expenditure and therefore not deductible as repairs under section 25-10 of the ITAA 1997. | Consumer tribunal costs | The costs in taking the matter of the defective and incomplete work to the relevant consumer tribunal were part and parcel of the above work. | The portion of the costs that relate to your repair work and loss of rental income is not capital in nature and is an allowable deduction. | However, the portion that relates to the capital works are capital in nature and form part of the deductible capital works deduction under Division 43 of the ITAA 1997. | Apportionment of expenses | As your consumer tribunal costs relate partly to capital expenditure, you will need to apportion the expenses using a reasonable basis. Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances. | Where the costs are not broken up into the relevant parts, you will need to calculate the deductible portion. One way to apportion your expenses relating to the defective and incomplete work is according to the dollar value of the repairs as compared to the total amount being sought. The relevant percentage that relates to the repair work is an allowable deduction. The remainder forms part of your capital works expenditure and deductible under Division 43 of the ITAA 1997.


Relevant facts: You have a rental property which has been rented at commercial rates for several years. | You are the sole owner of the property. | Minimal repairs have been done previously, however in the 2011-12 income year you had work done on the property. | You received some rental income in the 2011-12 income year from the property. | You paid entity A for the work they did. | However some of their work was defective and other work was not completed. As a result you did not pay the final 25% of the quotation. | You entered into a contract with entity B to complete the unfinished work and to correct the defective work. You paid money for this work. | You took the matter of defective and incomplete work to the relevant consumer tribunal in the 2011-12 income year. | You were granted a settlement in respect of defective and incomplete work and in respect of lost rent. | These amounts will be declared in your tax return when received. | Work carried out includes: | · Remove all sanitary fixtures and fittings | · Chip away all floor and wall tiles and prepare bathroom for waterproofing | · Install new bath and waterproof floor and wall area around new bath | · Adjust all plumbing to cater for new fixtures | · Additional excavation, mesh and concrete slab work | · Retile walls and floor area like for like | · Supply smaller vanity unit to allow for installation of new mini line corner laundry tub and adjust plumbing for new tub and washing machine | · Supply and install new tap ware to bath, shower, vanity and laundry tap ware | · Supply and install new toilet and cistern | · Supply and install new slim line vanity and framed mirror above vanity | · Supply and install new towel rails, toilet roll holder and soap dish | · Supply and install new bathroom door, shower screen and furniture | · Remove all debris from site | · Replace broken glass in bathroom window and | · Supply and install glass bath panel and mirror. | The bathroom and laundry are in one room. | General work -: · Repair lead flashing to RHS front roof area | · Replace and install downpipe to front of property | · Repair side gate that was hard to close | · Cut new man holes to loose sections of flooring | · Replace existing flooring cut away for access using yellow tongue sheet flooring (this applies to a small area in the hall and two bedrooms) | · Pack existing bearers and joists and level to make secure | · Refix new skirting to all areas removed for new damp course installation, patch wall areas damaged by removal of existing skirting, using original skirting where possible | · Supply and install new skirting to family room | · Replace rear doors to match existing | · Replace rotted timber window to family room to match new rear doors | · Replace all rotted window sills, re-putty windows and prime ready for painting | · Supply and install new door furniture to all internal doors to match | · Supply and install new mirrored built in wardrobe to main bedroom | · Key in existing brickwork and construct new brick wall to existing area adjacent to kitchen | · Supply and install new window to altered kitchen and weatherproof, window to match new windows and door to family room | · Brick up existing kitchen window and render | · Demolish existing kitchen wall to open up kitchen area to family room | · Patch all affected walls and ceilings | · Repair existing attic ladder cover and ensure it fits flush to ceiling | · Remove security grills from front of property and bathroom window | · Remove existing rear fence and supply and install new colour bond panels to match side fence | · Install clothes line and door sill | · Cut out and install new wall vents | · Run and install three telephone points | · Install hardwired smoke detector in hallway | · Supply a rubbish skip and remove all works rubbish | · Clean pavers, rear fence and interior and | · Remove floating floor and polish existing pine flooring in living area. | Kitchen work -: · Demolish existing kitchen and dispose of materials | · Make good all kitchen area including floor area ready for installation of new kitchen | · Adjust all plumbing and electrical connections to suite re modelled kitchen | · Supply and install new 16mm high moisture resistant kitchen cupboards with quality vinyl wrap doors | · Supply and install new 38mm laminate bench tops and tiled splash backs | · Install new 1.5 bowl kitchen sink including flick mixer | · Supply and install new under bench oven, hotplates and range hood | · Supply and install new tiled splash back to suit new kitchen | · Supply and install new tiled floor area to new kitchen | · Strip kitchen and splash back | · Remove wall and window construct wall and fit window | · Supply new dishwasher cabinet and pipes and pantry | · Complete plumbing and electrical work including new power supply to oven and relocate power point for oven and dishwasher. | Patch, prepare and paint internal walls, ceilings and woodwork, and external of property. | · Lift and remove all carpet, smooth edge and underlay | · Supply and install new carpet throughout with underlay and new smooth edge | · Supply and install new slimline Venetian blinds to all windows | · Supply and install new pendant style light fittings throughout | · Supply and install new oyster style light fittings to family room, bathroom and kitchen | · Replace all power points and switches | · Carry out full electrical test and | · Install new extractor fan to kitchen and bathroom.