Private ruling: Rental property expenses
Published: September 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for replacement of the roof on your rental property? | A1: Yes | Q2: Are you entitled to a capital works deduction for installing insulated sheet material to the roof of your rental property? | A2: Yes

Relevant facts and circumstances: Your rental property had concrete tiled roofing. After purchase of the property several years ago you lived there for one year and then commenced renting the property. After you began to rent the property you have had a number of roof leaks causing damage to the internal part of your property. Your property has continued to receive further damage from subsequent rains due to the leaking roof. You undertook to replace the concrete tile roof with that of colorbond metal sheeting due to the poor condition of the existing tiles and advice that re-conditioning of the tiles would not be viable. You have added insulated sheet material between the metal roof and roof battens which acts as a moisture barrier. No other structural or shape modifications were made. You have provided a copy the builder's invoice listing costs and payments. You provided a copy of the property inspection report you obtained at the time of purchase and an assessment letter from the roof builder.

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

Reasons for decision: Summary: 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 repair work is an initial repair · the extent of the work carried out represents a renewal or reconstruction of the entirety, or · the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair'. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. Taxation Ruling TR 97/23 states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. | Detailed Reasoning - Entirety: An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1961) 106 CLR 377 at 385). Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety' | Detailed Reasoning - Initial repair: It is not considered that the work undertaken is an initial repair. | 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. In your case, the concrete roof tiles on your rental property had deteriorated and the roof was leaking. You replaced the concrete roof tiles with colorbond metal sheet roofing. In addition you installed sarking insulation between the metal roof and roof battens. | Detailed Reasoning - Roof: It is accepted the use of colorbond to replace the concrete tiles constitutes a repair as the change in material did not improve the efficiency or function of the property. The roof has merely been repaired by its modern equivalent which restored the original function. Therefore, you and your spouse are entitled to a deduction for the cost of replacing the roof of your rental property under section 25-10 of the ITAA 1997. | Detailed Reasoning - Roof insulation: You incurred expenses in installing insulated sheet material in the roof. The expenditure incurred is considered to be an alteration or improvement to the building and qualifies as a capital works expense and 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 installing insulated sheet material in the roof at your investment property you have carried out an improvement 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 for the roof insulation under section 43-10 of the ITAA 1997.

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