Private ruling: Rental deductions
Published: January 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the expenditure incurred in renovating the bathroom of your rental property an allowable deduction as a repair? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10.

Reasons for decision: Summary: The bathroom renovations are considered an improvement to the rental property and you are therefore not entitled to an immediate deduction. | Detailed Reasoning - Detailed reasoning: Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for non-capital expenditure incurred on repairs to premises or depreciating assets held or used for the purpose of producing assessable income. Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable, and states that 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. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. | Detailed Reasoning - Distinction between a repair and an improvement: TR 97/23 states that with a repair, the work restores the efficiency of function of the property without changing its character. An improvement, on the other hand, provides a greater efficiency of function in the property. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. However, if the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10. TR 97/23 states that 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 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. If work done to property goes beyond what is a repair, any expenditure for the work is not deductible under section 25-10 (TR 97/23). The work may go beyond repairs if it: · changes the character of the property; or · does more than restore its efficiency of function. (However, the cost of this work may be deductible under other provisions of the income tax law, for example Division 43 of the ITAA 1997 (capital works provisions)). TR 97/23 states that if work done goes beyond repair and the whole cost is capital expenditure, no amount is allowable as a deduction for 'notional' repairs, that is, an estimate of what it would have cost if the property had in fact merely been repaired. The issue of distinction between a repair and an improvement has been considered in many judicial and tribunal decisions. In Case V167 88 ATC 1107; Case 12 (1986) 18 ATR 3056 ( Case V167 ), work carried out to the rental property included the replacement of some of the original kitchen cupboards and fittings, which were slightly water damaged, by more modern units. The layout of the kitchen was reorganised, and an island bench with cupboards underneath was provided which was in keeping with modern concepts of design. Overall no additional storage facilities were provided. In addition, a timber framed window in the kitchen was replaced by an aluminium framed window (set in the same opening). The window was said to have deteriorated due to weathering and water damage. It was held that the kitchen was restructured according to modern standards, while the deterioration of the window frame was not such as to make replacement the most appropriate means for effecting any necessary repairs. Accordingly, the works carried out on the kitchen and the window frame could not be classified as repairs and the expenses were not deductible. P.M. Roach (Senior Member) stated: The kitchen was part of the lettable structural entity, but I am satisfied upon the evidence that the kitchen was "renovated" not so as to only make good deficiencies which had developed over a period of time and to only restore the kitchen to its original condition so far as that was possible. Instead, the work undertaken was to restructure the kitchen according to a new standard perceived, according to the fashion of the time, as being a better standard. Even though cupboard space was not increased the layout and arrangement; the method of construction; and the appearance of the kitchen were all changed substantially. I am not persuaded that any portion of those works should be characterised as "repairs". Nor did the window replacement constitute repair. It too contributed to the image of the new kitchen. As discussed above, repair involves a restoration of property to a condition it formerly had without changing its character. In your case the work performed in the bathroom of your rental property did more than merely remedy the leaking rusted bath, and rectify the damage caused by that leak. The work was not limited to those defects, but was enlarged into a substantial alteration or refurbishment of the bathroom. This is evidenced by the fact that you made a decision to remove everything in the bathroom and replace the bath with a new shower alcove and install a new toilet and hand basin. The work carried out was a complete bathroom renovation. It did more than meet the need for restoration of efficiency of function; it provided a bathroom having considerable advantages over the old one. The work goes beyond a repair, and is an improvement due to the nature and extent of the work done (as in Case V167 ). The cost of the bathroom renovation is capital expenditure, and a deduction is not allowable for the expenditure under section 25-10 of the ITAA 1997.

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. | Relevant facts: You purchased an investment property several years ago. | The property has always been used as an investment property. | At the time of the purchase the bathroom was old but serviceable, being the original bathroom from when it was built. | During the 2010-11 financial year the bath rusted away which led to leaking and damage. | In order to repair the bath, the whole bath had to be removed. This required all the tiles in the area of the bath wall and floor to be removed. | It was not possible to do this without damaging the tiles as well as the bath. | As the tiles were the original tiles from construction they were unable to be matched with replacement tiles. | Due to this you decided to remove everything in the bathroom. | The original bathroom had a shower over the bath. | When the bathroom was repaired, the bath was not replaced and a shower alcove was installed. | The toilet and hand basin were replaced with newer but similar items.