Private ruling: Rental property expenses
Published: February 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim an immediate deduction for the cost of replacing the roof of your rental property? | A1: Yes | Q2: Are you entitled to claim an immediate deduction for the cost of replacing the guttering of your rental property? | A2: No

Relevant facts and circumstances: You own a property which has been let since purchase. The property is managed by an agent, a commercial rate of rent is charged, and the tenants are not related to you. There was no indication of leaks in the roof at purchase, and the tenants first complained about the roof leaking following heavy rain and storms. You obtained several quotes for repairs, and tradespeople agreed that replacement was recommended as there were several places in the roof which needed repairing and there was water damage to the ceilings throughout the house. Replacement of the roof and guttering was completed. The guttering which was replaced was still serviceable, but was replaced as it was convenient to do so while the roof was being replaced.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Subsection 25-10(3) | 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 denies a deduction for repairs where the expenditure is of a capital nature. | Detailed Reasoning - The meaning of repairs: Section 25-10 of the (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. 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 - Replacing of roof: In W Thomas & Co v. FC of T (1965) 115 CLR 58 , 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. 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. 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'. The replacement of the roof is therefore not capital. In your case, you replaced the existing corrugated iron roof with the same sort of material as it has deteriorated during the time it has been rented. Therefore, you 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 - Replacing of guttering: Taxation Ruling TR 97/23 explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the ITAA 1997. Expenditure incurred for repairs is not deductible under section 25-10 of the ITAA 1997 if the expenditure is of a capital nature. Subsection 25-10(3) of the ITAA 1997 precludes a deduction for capital expenditure. Work done partly to remedy or make good defects, damage or deterioration does not cease to be a repair if it is also done partly - even largely - to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property or in rectifying defects in their very early stages. Repairs are not confined to rectifying defects, damage or deterioration that has already become serious. Work done to property not in need of repair , however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10. Your expenditure on replacement of the guttering is not deductible outright (under section 25-10 ITAA 1997) in the income year in which it is incurred, because it is work done to property not in need of repair, and so is capital expenditure. However, a deduction may be available under the capital works provisions (Division 43 ITAA 1997). The capital works provisions allow a deduction for certain capital expenditure on the construction of buildings and other capital works which are used for the purpose of producing assessable income. Eligible construction expenditure is written off over a number of years. However, it should be noted that the write-off deduction is allowable only for the period your property is rented or is available for rent (section 43-140 ITAA 1997).