Private ruling: Rental property expenses
Date of advice: 24 December 2015
Published: March 2016
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for the cost of replacing the deck, and a stair case on your rental property? | A1: Yes.

Relevant facts and circumstances: You own a rental property. You purchased the rental property in 200X The property was rented to tenants in 200X. A building and pest inspection was carried out at the time of purchase. At the time of purchase there was no sign of insect problems. The property became infested with insects which caused structural damage to the deck and stair case. As a result, work was carried out to replace the deck and staircase.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | 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. 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 extent of the work carried out represents a renewal or reconstruction of the entirety, • the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', • the work is an initial repair. | Detailed Reasoning - Replacement of a subsidiary part or an entirety: TR 97/23 at paragraph 38 considers that a property is more likely to be an entirety if: • the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if: • it is an integral part of some larger item of plant; • the property is physically, commercially and functionally an inseparable part of something else. In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 14 ATD 78; (1965) 115 CLR 58, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. | 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. | Detailed Reasoning - Initial repair: If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of effecting, an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. | Detailed Reasoning - Application to your situation: Work to replace the deck and stair case to your rental property restores the efficiency of function of the deck and does not provide any substantial improvement and is considered repairs. At the time of purchasing the property you undertook a pre purchase building and pest inspection. The report indicated that the deck and stairs was in a satisfactory condition and overall structure and wood integrity was sound. Therefore it is not an initial repair. The expenses that you incurred were to restore the property to its original state and function. You have not renewed or reconstructed an entirety or carried out an improvement. The work done is not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs under section 25-10 of the ITAA 1997.