Private ruling: Rental properties and deductibility of repairs
Published: March 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for the expenses incurred in replacing the roof of a rental property? | A1: Yes

Relevant facts and circumstances: You are the sole owner of a rental property which has been rented for a number of years. The roof is made of asbestos sheets. When you took ownership of the property the roof was 'functionally effective in its purpose'. On recent inspection by a qualified roofer, you were advised that there are a number of defects that need immediate attention, as water leaking into the property causing damage. As you are not able to effectively repair the damaged asbestos roofing, you are required to replace the entire roof including the water damaged rafters and battens. The replacement product will be a modern day equivalent, being colorbond steel.

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 (ITAA 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. Accordingly, it takes its ordinary meaning. Taxation Ruling 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. 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. Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'. The replacement of the roof is therefore not the replacement of an entirety. Expenditure will also be capital in nature if it is for an improvement or an initial repair. The use of a like material to replace the asbestos roofing would not constitute an improvement as the change in material does not improve the efficiency of function of the property. Also, the replacement of the roof is not an initial repair as the roof was functionally effective when you acquired the property. The damage was caused by wear and tear during the time it has been rented. Therefore, you are entitled to a deduction for the cost of replacing the roof of your rental property, under section 25-10 of the ITAA 1997.