Private ruling: Rental property repairs
Date of advice: 27 April 2017
Published: June 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Can you claim a deduction for the cost of the work that was completed on the balcony of your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) as a repair? | A1: Yes.

Relevant facts and circumstances: You purchased a third floor apartment (the Property) in 20XX. The apartment began producing assessable income at the end of 20XX. Your real estate agent notified you that the tenant in the apartment downstairs complained of water seepage through the ceiling, particularly after heavy rain and storms. Water was leaking through cracks and joins of the tiles on the balcony of the third floor apartment. You engaged a tradesman to complete work on the balcony to resolve the water seepage. The total cost of this work was $XXXX. The Property was in good condition when first purchased and maintenance has always been carried out. You were unaware of the water seepage when the Property began to produce assessable income. The issue was brought to your attention in or around 20XX.

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

Reasons for decision: Summary: Can you claim a deduction for the cost of the work that was completed on the balcony of your rental property under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) as a repair? Yes. | Detailed Reasoning - This ruling applies for the following period(s): Year ending 30 June 2017 | Detailed Reasoning - The scheme commences on: 1 July 2016 | Detailed Reasoning - Relevant facts and circumstances: You purchased a third floor apartment (the Property) in 20XX. The apartment began producing assessable income at the end of 20XX. Your real estate agent notified you that the tenant in the apartment downstairs complained of water seepage through the ceiling, particularly after heavy rain and storms. Water was leaking through cracks and joins of the tiles on the balcony of the third floor apartment. You engaged a tradesman to complete work on the balcony to resolve the water seepage. The total cost of this work was $XXXX. The Property was in good condition when first purchased and maintenance has always been carried out. You were unaware of the water seepage when the Property began to produce assessable income. The issue was brought to your attention in or around 20XX. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10. | Detailed Reasoning - Reasons for decision: 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. 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. In your circumstances, the grout and caulking in and around the tiles on the balcony has failed, leading to water seeping into the apartment below. You have engaged a tradesman to carry out the necessary work at a cost of $XXXX. The work involved replacing: the broken tiles, the caulking and the grout to prevent any future water seepage. We consider that any gain through different materials being used in the replacement of parts of the balcony to be a minor and incidental improvement and does not affect the overall efficiency of the balcony. Therefore, the work that was carried out is deemed to be a repair and not an improvement. As you have held the Property for the purpose of producing assessable income, you may deduct the cost of the repairs to the balcony in the year they were incurred.