Private ruling: Repairs
Published: December 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the repairs completed to your unit considered repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA1997)? | A1: Yes. | Q2: Is the work done to your unit to meet requirements of the council considered repairs under section 25-I0 of the ITAA1997? | A2: No.

Relevant facts and circumstances: Your unit began to deteriorate with water ingress, leaking to balconies, ceilings, render and cladding peeling off. The Body Corporate committee made a decision to complete a maintenance report after numerous attempts for claims with the initial builder resulted in avoidance and inactivity. The report primarily reported; due to defective workmanship and materials with cladding, installation and tiling, this has resulted in water ingress to internal balconies and apartments as well as cladding being broken off the exterior of the façade, poor installation of roof cover flashings, poor installation of rendered wall with bad positions of sheet joints, render coat was lacking fibreglass mesh reinforcing, and the poor installation of balcony tiling, waterproofing and substrate. An additional cost was incurred for the balcony mesh and balustrade to be compliant with council regulations. All parties involved including have acknowledged the works as entirely of a repair nature as there has not been any capital improvement whatsoever. The works carried out gave the same outcome of having the building look the same as before (without the defects) there has been no changed in appearance.

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 allows a deduction for the cost of repairs to premises used for income-producing purposes. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital nature. The word 'repair' is not defined within the taxation legislation. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. In W Thomas & Co v. FC of T (1965) 115 CLR 58 , it was held that a 'repair' involves a restoration of a thing to a condition it formerly had without changing its character. It is the restoration of efficiency in function rather than the exact repetition of form or material that is significant. Paragraph 87 of TR 97/23 states; What is a 'repair' for the purposes of section 25-10 is a question of fact and degree in each case having regard to the form, state and condition of the particular property and its functional efficiency when the expenditure is incurred (per Buckley LJ in Lurcott v. Wakely & Wheeler [1911] 1 KB 905 at 924) and to the nature and extent of the work done. 'Repair' may involve renewal or replacement of subsidiary parts to some degree and may involve improvement but only to a minor and incidental extent. | Detailed Reasoning - Work done to meet requirements of regulatory bodies: Paragraph 96 to 99 of the TR 97/23 states; To constitute a 'repair' for the purposes of section 25-10, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in this Ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section. A 'repair' for the purposes of section 25-10 is, fundamentally, work done to remedy or restore a defect in, damage to, or deterioration of, property in a mechanical or physical sense. We take the view that 'repair' does not extend to a removal of any impediment to the holding, etc., of property for income purposes arising solely from regulatory requirements. This is clearly demonstrable if the property is otherwise functioning (in a mechanical or physical sense) as intended and, in that sense, is not in a state of disrepair. If Government regulations, for instance, require something to be added to property (e.g., an automatic sprinkler system to a building or an air bag to a motor vehicle), work done to comply with this requirement does not constitute a repair because it is not work done to remedy or make good any defect, damage or deterioration in a mechanical or physical sense. In any event, this is likely to involve capital expenditure and be excluded from section 25-10. In your case, you have owned the property for a number of years. You have undertaken work to correct the damage to tiling, paint, render and cement sheets in accordance with a building report. Consequently, as your property is used for income producing purposes and the repair work was not an initial repair, is not the replacement of an entirety and is not an improvement; a deduction under section 25-10 of the ITAA 1997 is allowable. However no deduction under section 25-10 of the ITAA 1997 is available for the additional cost incurred for the balcony to be compliant with council regulations.