Private ruling: rental property expenses
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for expenses that you incurred in respect of replacing the windows in your rental property? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You own a rental property overseas and include the income from it in your Australian tax return. You purchased the property many years ago, and it is managed by an agent. The property has been continually rented for many years. You have paid for all repairs, and no insurance claim applied. The window frames in the house were probably original from when the house was built over 100 years ago, and were timber framed sash type. You had renovated the timber windows after purchase and since then over a long period of time tenants have mentioned that it has been increasingly difficult to maintain reasonable temperatures and living conditions. You have replaced all of the original single glazed timber windows and rotted frames with factory pre-made windows which are double glazed. Double glazing is now the standard for windows used in the overseas country.

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) generally allows a deduction for expenditure incurred on repairs to premises or plant held or used by a taxpayer for the purpose of producing assessable income. However, capital expenditure is not deductible under section 25-10. Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10. TR 97/23 states that in its context in section 25-10, the word 'repairs' has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing it's character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. However, no deduction is allowed where the expenditure constitutes an initial repair, a replacement of an entirety or is an improvement. In your case the work undertaken is not an initial repair or the replacement of an entirety. If expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue. The use of a more modern material still qualifies as a repair if it restores efficiency of function without changing the character of the property. If the work done restores the previous function or restores the efficiency of the function, this is what is significant, and even if the use of the different material allows a marginal improvement in efficiency of function, the work may still constitute a deductible repair. You have replaced the timber windows and frames in your rental property with double glazed windows and frames, as the original timber window frames had rotted. While different materials have been used, the character of the windows has not changed. It is accepted that the modern equivalent window standard in the overseas country is for double glazed windows. Therefore, you are entitled to a deduction for the expenses that you incurred in respect of replacing the windows in your rental property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.