Private ruling: Rental deductions
Date of advice: 12 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to claim the cost of rectifying damage caused by nature disaster to your rental property as a repair?

Relevant facts and circumstances: You own a rental property in a foreign country and the rental income has been declared in your Australian tax return. The property was damaged by a nature disaster. Work to rectify the damage has been commenced. Repairs include replacing the plasterboard, rebuilding the structural wall, repairing the wall, plastering painting, replacing partition walls. The work has not been completed.

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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 : Income tax: deductions for repairs , 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. In your case, you have incurred expenses on your rental property which was damaged by nature disaster, the work including include replacing the plasterboard, rebuilding the structural wall, repairing the wall, plastering painting, replacing partition walls. These works were not initial repairs or replacements of entireties; nor were they improvements. You have incurred these expenses to restore your property to a rentable state. As such, you are entitled to a repairs deduction under section 25-10 of the ITAA 1997 for the cost of these works. | Detailed Reasoning - Further issues for you to consider: A potential Foreign Exchange (FOREX) gain or loss would arise from when you receive your bill and then settle the account. The gain or loss would arise if there is a change in the currency rate from the date you receive the bill until the date you pay the account. More information can be found on our web site at www.ato.gov.au and by typing in QC 16867.