Private ruling: Rental property - repairs
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the following work carried out to your rental property? • repair the cracked walls • replace rotting fascia and barge boards • replace section of the eaves • relaying brick work? | A1: Yes.


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

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. | Detailed Reasoning - The meaning of repairs: Taxation Ruling TR 97/23 provides guidelines on the deductibility of repairs. Generally a repair involves a restoration of a thing to a condition and efficiency it formerly had without changing its character. Works can be fairly described as repairs if they are done to make good damage or deterioration of property that has occurred by ordinary wear and tear, by accidental or deliberate damage, or by the operation of natural causes during the passage of time. Paragraph 16 of TR 97/23 explains 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 - Capital nature: 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 that a repair. | Detailed Reasoning - What is entirety?: Paragraph 38 of TR 97/23 explains that a property is more likely to be an entirety if: • the property is separately identifiable as a principal item of capital equipment; or • the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or • the thing or structure is a unit of property as that expression is used in the depreciation deduction provisions of the income tax law. | Detailed Reasoning - Improvement: While a repair restores the efficiency of the function of the property without changing its character, an improvement goes beyond this and provides a greater efficiency of function in the property. An improvement usually brings the property into a more valuable or desirable form or condition than a repair would and generally changes the character of the property. However, different materials may be used to repair the property, for instance, repairing a property with its modern equivalent. A repair refers to the restoration of efficiency rather than the exact repetition of form and materials previously used. An improvement involves more than merely using a different material, it must also give a better result. | Detailed Reasoning - Application of the above to your situation: Your rental property was rented for a number of years. The property is a brick house and the walls of the property were in good condition when purchased. The removal and replacement of the damaged brick work with sheeting is not considered an initial repair or a renewal or reconstruction of the entirety. A review of the quote supplied by the builder indicates the work carried out is not considered an improvement as it is accepted the use of the sheeting materials to replace the brickwork constitutes a repair as the change in material did not improve the efficiency or function of the property. The work undertaken on the brickwork indicates the walls have been restored to their original function. Similarly the work undertaken to replace the facia, barge boards, eaves and relaying of the brick work are also considered repairs and the expenses incurred are deductible under section 25-10 of the ITAA 1997.

Relevant facts: You and your spouse jointly purchased a property. | The property is a brick house and was in good condition when it was purchased. | The property was rented for a number of years. | The property had deteriorated due to the weather which caused the rotting of the fascia and barge boards of the property. In addition, the expansion and contraction of the earth has resulted in foundation of the property sinking causing the walls to crack. | You engaged the services of a builder to undertake the following work: | • replace the rotting fascia boards | • replace the barge boards and the eaves | • remove the cracked brick work and replace the walls with sheeting | You advised that the new sheeting is lighter but is more susceptible to damage due to impact and requires painting after a number of years.