Private ruling: Rental property deduction
Published: May 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a repairs and maintenance deduction for work undertaken on your rental property? | A1: Yes

Relevant facts and circumstances: You have owned a rental property for several years. After some years the property manager noticed water damage to the property. The water damage became more pronounced over the following months. A builder was engaged to assess the situation and recommended that a part of the structure should be replaced. Failure to replace the structural item would result in further deterioration of the property. The structural item was replaced with one of the same size and nature. Associated fittings were removed and replaced with fittings of the same style, colour and nature.

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. The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character ( W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710). Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) deals with deductions for repairs. According to paragraph 16 of TR 97/23, to repair is to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. Whether work constitutes a repair depends on the facts of each case having regard to the appearance, form, state and condition of the particular property at the time of the expense, and to the nature and extent of the work done. A repair may be capital expenditure if it is an initial repair, that is, where the repair remedies some defect or makes good damage or deterioration to the property which existed when the property was acquired and does not arise from the operations of the taxpayer who incurs the expenditure. It is not considered that the replacement of the beam is an initial repair. In addition to initial repairs in the following circumstances repairs are capital in nature and not deductible: • where the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair', or • where the extent of the work carried out represents a renewal or reconstruction of the entirety. In your case, the rental property's structural item had deteriorated over time and was recommended by your builder to be replaced to prevent further damage to your property. You had fittings removed and replaced to replace the structural item and all materials used were of similar style, colour and nature to that of the originals. The replacement of the structural item is not a replacement of an entirety, as the item is considered only part of the building (it is not separate to the building and is not capable of providing a useful function without regard to any other part of the premises); and it is not an improvement, as similar materials were used and the work simply restores the property to a condition of good working order. Therefore, the replacement of the structural item is a repair to the rental property and the cost is deductible under section 25-10 of the ITAA 1997.