Private ruling: Rental property
Date of advice: 17 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the costs of the work done in relation to the rental property deductible repairs? | A1: Yes. | Q2: Are you entitled to a repair deduction for the remainder of the work carried out on your rental property? | A2: No.


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

Reasons for decision: Summary: You are entitled to a deduction for some of the work done as they are considered to be repairs. However it is considered that the remaining items are capital in nature and therefore a repairs deduction is not allowable. | Detailed Reasoning - 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 IT 180 states that a deduction may be allowed for the cost of repairs to a property after it ceases to be income producing if the necessity for the repairs can be related to when the premises were rented and the premises were used to produce assessable income in the income year that the repairs were incurred. In your case rental income was earned in the same income year as the work to the property was done and therefore a deduction for repairs may be allowable. We must now consider whether the work done qualify as repairs. Taxation Ruling 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. A repair restores the efficiency of function of the property without changing its character. TR 97/23 indicates that expenditure for repairs to property is of a capital nature where: n the extent of the work carried out represents a renewal or reconstruction of the entirety, or n the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or n the work is an initial repair. 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. In your case, the work done to replace the damaged areas is considered to be a repair. Specific areas were restored to their original condition, function and appearance. The work is not regarded as an improvement or capital in nature. Therefore the associated expenses are deductible repairs under section 25-10 of the ITAA 1997. Similarly, work to the interior walls and the exterior work done are regarded as deductible repairs under section 25-10 of the ITAA 1997. 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 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. With respect to a particular room, the tenants reported issues with the room. You offered to renovate the entire room but the tenant refused because of the disturbance it would cause them. After the tenant moved out when they did not renew their lease, you had the room pulled out and a new one installed. Although there were some issues with the room, the work done being the installation of an entire new room, has gone well beyond merely rectifying those issues. It is considered that the work done to the room is an improvement and therefore does not qualify for a repairs deduction. In any case, with respect to the new appliances, a repairs deduction would not be available because these items are depreciating assets (see below) and therefore capital items. 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 appliances and various relevant items are regarded as depreciating assets for the purpose of Division 40 of the ITAA 1997. However, as you did not rent out the property after the installation of these assets, they weren't used to produce assessable income and therefore no deduction is allowed under Division 40 of the ITAA 1997 for these new assets. Please note that a deduction may be allowed for the balancing adjustment events occurring in relation to the former depreciating assets in the unit that were replaced. Please also note, that the capital costs incurred may form part of your cost base for capital gains tax purposes.

Relevant facts: You purchased a rental property several years ago. | You did not see signs of any movement or structural issues at the time of purchase. The property was purchased privately with no formal building inspections carried out. | You rented out the property after purchase. | A couple of years ago the tenant requested repair maintenance. | You informed the tenant that you will renovate the specific room to resolve the issues. However the tenant did not want the renovation to go ahead due to the disturbance it would cause them. | There was significant ground movement, causing structural damage throughout the unit and foundation. This in turn caused further hazards to the tenant. | The tenant did not renew their lease and moved out of the property during the 2014-15 income year. You advised the tenant that they did not need to have the floors cleaned nor appliances cleaned at the end of their tenancy as you are doing a full renovation. | You started significant repairs and capital works on the property while it was vacant. | Remove and reinstall wardrobe $ xxx | New kitchen including appliances $ x,xxx | Concrete slab and related work $xx,xxx | Specific tiles were replaced because they were all either broken or missing. | Only the tiles that were damaged were replaced. | A new extraction fan was installed in a different location to the original. | The concrete slab repairs were to a portion of the slab that had subsided and was no longer level. The associated skirting boards were removed and replaced to these areas. | Damaged parts of the fence were replaced. | An exterior door was damaged and therefore replaced. | After the work was done you needed to sell the property to recoup the expenses incurred in fixing the foundations and fixtures. | The property was sold during the 2014-15 income year.