Private ruling: Deduction - rental property repairs
Date of advice: 3 July 2023
Published: 28 August 2023
Ruling period: Year ended 20XX
Date scheme commenced: 1 July 2021

Ruling: Q1: Are you entitled to claim the entire cost of re-roofing your Rental Property as a tax deduction in the year of payment? | A1: Yes. 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 following are examples of expenses which are capital or of a capital nature: • replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator) • improvements, renovations, extensions, and alterations, and • initial repairs, for example, in remedying defects, damage or deterioration that existed at the date you acquired the property. Taxation Ruling TR 97/23 Income tax: deductions for repairs explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. The term 'repair' 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 its 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. 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. Expenditure for repairs to property is capital expenditure if the expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety. Relevantly, paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered a subsidiary part rather than the entirety. Paragraph 50 of the TR 97/23 explains if the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. In your case the work was done merely to restore the functioning of the roof, which is a subsidiary part of the building rather than an asset in its entirety. As the roof was in a good state at the time you purchased the property the work done is not an initial repair.

Relevant facts and circumstances: You purchased a residential property as a sole owner. The property was made available for rent a few months later. Due to the low purchase price, you did not engage a building inspection prior to purchase however you thought the roof to be quite sound at the time of purchase. Your father-in-law (a carpenter) looked over the house at the time of purchase and did not have any concerns with it. Over the last 6 years leaks have gone through the bathroom ceiling, where no roof cavity exists. You engaged a plumber and handyman on several occasions to fix the roof issue and attempted to fix the problem by having the bathroom/laundry area re-sheeted, without success, as the leaking continued. Eventually the bathroom ceiling collapsed and necessitated completion of the following: • the tin roof was replaced with a new Colourbond roof • installation of associated supporting timber and plaster work to repair the damage to the existing roof and bathroom. Due to the age of the roof, you were unable to make a claim through your rental property insurance. You paid for the work done to repair and replace the entire roof of your rental property. You seek to claim the entire cost as a repair deduction for your rental property in your income tax return.

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