Private ruling: rental property expenses
Published: October 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a repairs deduction for the costs incurred on your rental property? | A1: No. | Q2: Are you entitled to claim a capital works deduction for your portion of the following expenditure incurred for your rental property: · kitchen and bathroom work · replacing cupboards · plumbing and electrical · windows and doors · wardrobes · roof · pathway · painting and · fence? | A2: Yes. | Q3: Are you entitled to a deduction for your portion of the decline in value for the following items: § blinds § carpets and § lighting? | A3: Yes. | Q4: Are you entitled to a deduction for landscaping costs? | A4: No. | Q5: Are you entitled to a deduction for expenditure incurred in demolishing and removing a shed constructed of asbestos from your rental property? | A5: 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 Division 40 | Income Tax Assessment Act 1997 Division 43

Reasons for decision: Detailed Reasoning - Repairs: 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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. 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, or § the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', or § the work is an initial repair. 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. According to paragraph 125 of the TR 97/23, a repair after acquisition of property is an 'initial repair' if the repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended. 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. | Detailed Reasoning - Capital works: Section 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. Section 43-10 of the ITAA 1997 requires that: · the capital works have an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer (section 43-75 of the ITAA 1997); · there is an amount of construction expenditure incurred that is attributable to the capital works area (section 43-85 of the ITAA 1997); and · the construction area must be used in a deductible way at some time during the year of income for the purposes of producing assessable income. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997). | Detailed Reasoning - Kitchen and bathroom and wardrobes: The kitchen and bathroom are separately identifiable capital items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature and not a deductible repair ( Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997. The costs of the new kitchen and bathroom are also regarded as an improvement and therefore capital in nature. Therefore the expenses in relation to the new kitchen and bathroom fit out including the costs of the new bench tops, flooring, cupboards, tiles, shower, hand basin, WC, windows and associated plumbing and lighting and not deductible as repairs. However a capital works deduction is allowed under Division 43 of the ITAA 1997. As the other wardrobes are fixed to the walls, they are considered to be part of the building. A capital works deduction is allowed for this expenditure. | Detailed Reasoning - Painting, electrical, plumbing, doors, roof, pathway and fencing: The painting, electrical wiring, plumbing/pipes, fencing, pathway, roof and doors were in need of work when the property was purchased. That is, as the property was not in good order on purchase. Such work is regarded as initial repairs and capital in nature. Furthermore in relation to the electrical wiring, it should be noted that items wired and fixed to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997. These expenses are incurred for items that do not go beyond being part of the setting of an income producing operation. The items form a permanent part of the fabric of the building and are considered to be capital works for Division 43 purposes. The expenditure for the rewiring is capital expenditure for which a deduction is allowable under section 43-10 of the ITAA 1997 at the rate of 2.5%. We acknowledge that the painting may have deteriorated further after purchase. However, as the defects and deterioration was in existence at the date of acquisition and the work was carried out less than Y months after purchase, the work is regarded as initial repairs and therefore capital in nature. No deduction is allowed under section 25-10 of the ITA 1997. A deduction under Division 43 of the ITAA 1997 is allowable. | Detailed Reasoning - Landscaping: Landscaping work is considered to be an improvement and not a repair. Therefore no deduction is allowable under section 25-10 of the ITAA 1997. Subsection 43-70(2) of the ITAA 1997 excludes certain expenditure from 'construction expenditure'. Expenditure on landscaping is so excluded (paragraph 43-70(2)(d) of the ITAA 1997). Therefore no deduction is allowable under Division 43 of the ITAA 1997. No other provision is relevant in relation to the landscaping costs, therefore no deduction is allowable. | Detailed Reasoning - Garage: Section 40-755 of the ITAA 1997 provides a deduction for expenditure you incur for the sole or dominant purpose of carrying on environmental protection activities. Environmental protection activities are listed in subsection 40-755(2) of the ITAA 1997. One class of environment protection activities is preventing pollution of or from the site of your earning activity (subparagraph 40-755(2)(a)(ii) of the ITAA 1997). Your earning activity is, among other things, an activity you carry on for the purpose of producing assessable income. Leasing a site you own is regarded as an earning activity under subsection 40-755(4) of the ITAA 1997. Therefore a landlord may claim deductions for expenditure on environment activities. Pollution includes contamination by harmful or potentially dangerous elements such as asbestos. Accordingly, it is considered that you were carrying on environmental protection activities pursuant to subparagraph 40-755(2)(a)(ii) of the ITAA 1997 when the asbestos garage was demolished and removed. Therefore a deduction is allowed for demolishing the garage. | Detailed Reasoning - Depreciating assets: Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. Lights, blinds and carpets are regarded as depreciating assets for Division 40 of the ITAA 1997 purposes. A deduction for their decline in value is an allowable deduction where they are used for income producing purposes. For details on how to calculate the allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au. Please note these items are regarded as capital expenditure and therefore not deductible as repairs under section 25-10 of the ITAA 1997. Any costs in relation to the hardwiring of the lights are regarded as capital works and are deductible under Division 43 of the ITAA 1997. | Detailed Reasoning - Other information: Please note, you are only entitled to X% of any allowable deductions according to your legal title in the property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | § the application for private ruling, and | § additional information received. | You have a share in an investment property. The property was built more than 50 years ago. | You purchased the property during the relevant year with the intention of keeping the property as an investment property. | The property was tenanted when purchased. | In the subsequent year the tenant moved out of the property and you carried out some work costing more than $X. | After a number of weeks, the work was completed and the property was rented for more than previously. | When purchased, the property had damage from white ants, had patchy painting on the internal and external walls, fencing in poor condition and old deteriorating electrical wiring. The bathroom and windows were in poor condition and the age of the kitchen was apparent at acquisition. The garage was lined with asbestos fibro sheeting and was in generally poor condition. The pathway at the rear door was cracked at time of purchase. | § a new kitchen, including new bench tops, new flooring, new cupboards, | § a bathroom fit out including replacing tiles, shower, hand basin and WC and plumbing and fixtures; the bathroom door, part of timber frame and roof lining of the bathroom did not need replacing, | § work on the plumbing and electrical circuit, | § partial replacement of the electrical wiring as required and rewire large portion of house, | § replace broken and missing down pipes and in-ground terracotta pipes with PVC piping, | § landscaping yard after drainage works, | § replacing the old non-functioning timber windows in the kitchen and bathroom with aluminium windows, | § replacing timber doors that were damaged, marked and poorly fitted, | § replacing rotten timber floors, | § new lighting and carpets, | § new stand alone wardrobes that are fixed to the walls, | § replace portion of roof to fix leaks, | § replacing cracked pathway to rear door, and | § painting internal and some exterior surfaces. | The kitchen and bathroom lighting was replaced as part of the refurbishment of these rooms. The other lights in the lounge, one bedroom and the exterior light were replaced as they were damaged or worn. | All carpets in the bedrooms and lounge were replaced with carpets. The previous carpets were damaged from water ingress, damage from the tenant and general wear and tear. | Two of three of the boundary fences were completely fenced. The fence was in poor condition. The other boundary fence was left intact. Both the old and new fences were timber. | The paint deteriorated further after purchase. | The kitchen and bathroom plumbing were replaced plus other areas of plumbing as required. Some plumbing and pipes did not need replacement. | The floor in the kitchen is timber covered with lino.