Private ruling: Rental property works
Published: August 2013
Ruling period: Year ending 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to a repairs deduction for the following costs incurred on your rental property: § underpinning, § fixing damaged sewerage/drainage pipes, § plastering repairs, § painting and § yard and roof repairs? | A1: Yes. | Q2: Are you entitled to a repairs deduction for the other capital 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, · electrical work, · vanity, · new floor tiles and · new wired light fittings? | A3: Yes. | Q4: Are you entitled to a deduction for the decline in value for the exhaust fan? | A4: 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: 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, 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. | Detailed Reasoning - Underpinning: In your case, the underpinning work used similar material to what was previously there. The property is restored to its original condition, function and appearance. The work is not regarded as an improvement. The underpinning expenditure incurred is a deductible repair under section 25-10 of the ITAA 1997. | Detailed Reasoning - Painting and repairs: The painting, broken pipes, plastering, yard and roof work 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. | Detailed Reasoning - 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). | Detailed Reasoning - 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 benches, cupboards, 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 electrical work is fixed to the property and is considered to be part of the building. A capital works deduction is allowed for this expenditure. | Detailed Reasoning - Retiling floor: In your case you have replaced the carpet and tiled floor with tiles. The replacement of carpet with tiles is considered to be a capital improvement rather than a repair. This is because a different material has been used which will likely result in a benefit in the look and value of the property. As the tiling undertaken is considered to be a capital improvement, an outright deduction is not available under section 25-10 of the ITAA 1997. As the tiles are permanently fixed in place and are considered to become part of the building, a 2.5% capital works deduction is allowable. | Detailed Reasoning - 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. The exhaust fan is regarded as a depreciating asset for Division 40 of the ITAA 1997 purposes. A deduction for its decline in value is an allowable deduction when it is used for income producing purposes. Please note the extractor fan is a capital item and therefore not deductible as repairs under section 25-10 of the ITAA 1997.

Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | § the application for private ruling, | § including details of work carried out. | You have a rental property which has been rented for many years. | You are the sole owner of the property. | Following damaged water pipe and significant water pooling, the property suffered significant structural damage. | You made the house vacant to action the repairs. | None of the work was covered by insurance. | You received some rental income in the relevant income year from the property. | Work carried out included: | § Fully underpin the front walls of the residence, | § Re-support the timber floor bearers, | § Fix damaged sewage/drainage pipes, | § Remove and replace bathroom wall/floor tiles and shower screen, | § Remove existing toilet, re-levelling bathroom floor, | § Membraning floor/walls of wet areas | § Replace bathroom vanity, | § Replace kitchen cupboards and bench, | § Replace exposed asbestos walls with plasterboard, | § Replace non-functioning kitchen exhaust fan, | § Replace faulty florescent kitchen light, | § Repair and replace electrical work in kitchen and house fuses in fuse box, | § Levelling of living area floor required removal or old carpet and tiled floor, | § Replace faulty wiring in living room/dining room lamps, | § Plastering repairs to bedroom,