Private ruling: Rental deductions
Published: March 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for repairs for the following work carried out to your investment property? · removal of asbestos sheeting from shower area, vanity wall including skirt tiles and removal of shower wall · removal and disposal of all asbestos materials · removal of shower floor tiles, applying waterproof membrane to wet area · repair to damage wall plate · repair to damaged window frames on exterior bedroom and bathroom interior and exterior · removal of bathroom wall and re-sheeting · painting of all disturbed and renewed areas · repairs to damaged wall structure · re-sheeting removed walls and replacing cornices where required · insect treatment | A1: Yes | Q2: Are you entitled to a 2.5% capital works deduction for the following work carried out to your investment property? · New safety shower screen in steel frame · New shower wall set · plumbing to connect bathroom · new wall and floor tiles | A2: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 43-10

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature. 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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally, a repair involves a restoration of a thing to a condition it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. 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 of the ITAA 1997. In your case, you have incurred expenses for the following work on your rental property in relation to: · removal of asbestos sheeting from shower area, vanity wall including skirt tiles and removal of shower wall · removal and disposal of all asbestos materials · removal of shower floor tiles, applying waterproof membrane to wet area · repair to damage wall plate · repair to insect damaged window frames on exterior bedroom and bathroom interior and exterior · removal of bathroom wall and re-sheeting · painting of all disturbed and renewed areas · repairs to damaged wall structure · insect treatment As a result you have incurred expenses to restore your property to a rentable state. The above items are not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs. Capital works Section 43-10 of the Income Tax Assessment Act 1997 operates generally to provide a deduction for capital expenditure on capital works used to produce assessable income. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Capital works includes buildings and structural improvements or an extension, alteration or improvement to a building. In your case, you have incurred expenses for the following which are considered to be capital works on your rental property in relation to: · New safety shower screen in steel frame · New shower wall set · plumbing to connect bathroom · new wall and floor tiles Therefore you are entitled to a 2.5% capital works deduction for the above items.

Relevant facts: You and your spouse have a rental property which you have owned and rented for xx years. | Due to extensive insect damage to the bathroom you engaged a building contractor to carry out the following works.