Private ruling: Bathroom repairs and renovation
Date of advice: 28 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a capital works deduction for the following costs incurred on your rental property: ● demolition ● replacing concrete floors ● new plumbing ● tiling walls and floor ● electrical work ● painting of the bathroom ● replacement and refitting fixtures? | A1: Yes | Q2: Are you entitled to an immediate deduction for the following costs incurred on your rental property: ● repair damage to adjacent wall ● painting of the adjacent wall to the bathroom ● rubbish removal ● hire of portable bathroom suite? | A2: Yes

Relevant facts and circumstances: You own an investment property. The bathroom required a complete rebuild as water was seeping through the walls into the bathroom and adjacent bedroom and linen cupboard. The moisture was causing mould and deterioration in the wall surface. Several unsuccessful attempts were made to reduce the seepage and damage using various methods and you were advised the old plumbing would be an on-going issue if not replaced. It was concluded the damage was caused by defects in the original construction which worsened over time and the only effective solution was to remove all tiling, concrete floor, plumbing and fixtures and rebuild the bathroom.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Capital works: Division 43 of the Income Tax Assessment Act 1997 (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. 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. The renovation of the bathroom is an improvement and remedying defects that existed when you acquired the property. The expenditure is regarded as capital expenditure for which a capital works deduction is available under Division 43 of the ITAA 1997. | Detailed Reasoning - Repairs: 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. 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 The removal of rubbish, fixing and painting the adjacent wall are considered to be deductible repairs. That is, this work is not regarded as capital in nature and is regarded as maintenance expenditure. A deduction is allowable under section 25-10 of the ITAA 1997.