Private ruling: Rental property expenses
Published: October 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for repairs to replace the deck to your investment property? | A1: Yes | Q2: Are you entitled to a deduction for replacing the pool fence to your investment property? | A2: No | Q3: Are you entitled to a capital works deduction for replacing the pool fence to your investment property? | A3: Yes

Relevant facts and circumstances: You and your spouse purchased an investment property which was tenanted at the time. You and your spouse were informed by your real estate agent that the wood slats on the deck were moving and lifting and the deck was potentially unsafe for tenants. You sought advice from a registered builder who informed you that as a result of the excess wet weather the wood bearers had swollen causing the wood slats to lift and pivot when walked on. Your builder informed you that to successfully repair the deck, the entire deck would require replacing. That included posts, bearers and slats with like for like materials. You state that the replacement deck has not altered the size, form or configuration of the house or its surrounds nor has it introduced a different material use or construction method. You have provided a copy of the building inspection at the time of purchasing the property that mentions the deck to be a satisfactory state with overall structure and wood integrity being sound. You were required to replace the original glass and metal frame pool fence with a metal bar style pool fence in order to make the pool and its surrounding fence compliant with the latest State pool regulations. The original fence did not meet the latest legislation as it was 10mm short of the required height and the glass did not meet the latest Australian standards. The pool fence was in excellent condition and not in need of repair. The fence was replaced in the same location, was of the same length and did not add any structural or capital improvement. The fence was less in capital value than the original glass fence. The fence was installed wholly for the purpose of complying with retrospective legislation. At the time of purchase a building inspection report had not mentioned the pool fence was non compliant.

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

Reasons for decision: Summary: Work to replace the deck to your rental property restores the efficiency of function of the deck and does not provide any substantial improvement and is considered repairs. Therefore a deduction is allowable for the replacement of the deck. You are not entitled to a deduction for replacing the pool fence to your investment property as it is not a repair. However, the replacement of the pool fence is considered capital expenditure and you are entitled to a deduction for capital works. | Detailed Reasoning - Detailed reasoning: 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. In W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710, 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. Taxation Ruling 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, · the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', · the work is an initial repair. | Detailed Reasoning - Replacement of a subsidiary part or an entirety: TR 97/23 at paragraph 38 considers that a property is more likely to be an entirety if: · the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if: · it is an integral part of some larger item of plant; · the property is physically, commercially and functionally an inseparable part of something else. In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 14 ATD 78; (1965) 115 CLR 58, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. | Detailed Reasoning - Repair or 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. Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. 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. | Detailed Reasoning - Initial repair: If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. | Detailed Reasoning - Repairs to the deck: In your case, you have replaced the deck to your rental property. Due to above average rainfall experienced over several months the deck attached to your rental property was damaged. At the time of purchasing the property you undertook a pre purchase building inspection. The report indicated that the deck was in a satisfactory condition and overall structure and wood integrity was sound. Therefore it is not an initial repair. The expenses that you incurred were to restore the property to its original state and function. You have not renewed or reconstructed an entirety or carried out an improvement. The work done is not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs under section 25-10 of the ITAA 1997. | Detailed Reasoning - Replacement of pool fence: To constitute a repair for the purposes of section 25-10 of the ITAA 1997, work done to meet the requirements of regulatory bodies must satisfy the general principles and the various factors discussed in TR 97/23. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible. However, work done solely to meet requirements of regulatory bodies is not a repair for the purposes of section 25-10 of the ITAA 1997. In your case, you were required to replace the glass with metal frame pool fence with a metal bar style pool fence on your rental property. The pool fence was in excellent condition and not in need of repair. The fence was installed solely for the purpose of complying with the retrospective legislation enacted by the State Government. Therefore the cost of replacement of the pool fence is not deductible under section 25-10 of the ITAA 1997. However, Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. The rate of deduction for capital works for a residential rental property is 2.5% of construction expenditure over 40 years. By replacing the entire pool fence at your investment property you replaced a capital asset and any expense incurred is therefore considered to be of a capital nature. As such, you are entitled to a capital works deduction for the expenses you incurred under section 43-10 of the ITAA 1997.

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