Private ruling: Rental property expenses - repairs - depreciating assets - capital works
Published: May 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a repairs deduction for your share of the cost of repairs to your rental property? | A1: Yes. | Q2: Are you entitled to a decline in value deduction for your share of the cost of replacement depreciating assets? | A2: Yes. | Q3: Are you entitled to a capital works deduction for your share of the cost of replacement capital works? | A3: Yes.

Relevant facts and circumstances: You own a rental property jointly with your spouse. The property has been available for rent since you acquired it over ten years ago. You incurred expenditure for repairs to the property. You incurred expenditure on replacement depreciating assets and capital works.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 subsection 40-25(2) | Income Tax Assessment Act 1997 subsection 40-25(7) | Income Tax Assessment Act 1997 subsection 40-30(1) | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 section 43-25

Reasons for decision: Detailed Reasoning - Repairs: You are entitled to a deduction for the cost of repairs to premises used for income producing purposes providing the expenditure is not of a capital nature (section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). The word repair is not defined within the tax legislation and takes its ordinary meaning. Repair involves a restoration of a thing to a condition it formerly had without changing its character ( W Thomas & Co Pty Ltd v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710). Expenditure for repairs is of a capital nature where: • the work is an initial repair • the extent of the work carried out represents a renewal or construction of the entirety, or • the work results in a greater efficiency of function, therefore representing an improvement rather than a repair. Expenditure incurred to remedy defects, damage or deterioration in existence at the date of acquisition of property is an initial repair. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price reflected the need for repairs. An entirety is defined as something separately identifiable as a principal item of capital equipment ( Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201). An improvement provides a greater efficiency of function and involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life. If the work done restores a previous function, or restores the efficiency of the previous function, it does not matter that a different material is used. In your case, you incurred expenditure to repair the property. These works were not initial repairs or replacements of entireties; nor were they improvements. The works simply restored the property to its original condition without changing its character. As such, you are entitled to a repairs deduction under section 25-10 of the ITAA 1997 for your share of the cost of these repairs. You are not entitled to a repairs deduction for your share of the cost of replacing depreciating assets and capital works. These items are separately identifiable as principal items of capital equipment and the cost of replacing them is capital in nature. | Detailed Reasoning - Decline in value: You can deduct an amount equal to the decline in value for an income year of a depreciating asset to the extent that it is used for a taxable purpose (section 40-25 of the ITAA 1997). A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997), such as rental income. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997). Division 40 of the ITAA 1997 does not apply to capital works to the extent that an amount is or could have been deductible under Division 43 of the ITAA 1997. As you use the replacement depreciating assets in your rental property, and no amount is or could be deducted for them under Division 43 of the ITAA 1997, you are entitled to claim deductions for their decline in value. | Detailed Reasoning - Capital works: Items that are affixed permanently to the building and cannot be easily removed without causing damage are considered to form part of the fabric of the building. On this basis these items are not depreciating assets but are part of the setting of the income earning activity. As such they are not subject to deductions for their decline in value under section 40-25 of the ITAA 1997; however, a deduction may be allowable under Division 43 of the ITAA 1997 (subsection 40-25(2) of the ITAA 1997). Division 43 of the ITAA 1997 allows deductions for certain capital expenditure incurred on income producing buildings and other capital works, including alterations, extensions and improvements to buildings. The rate of deduction for capital works begun after 26 February 1992 which are used to produce rental income is 2.5% (section 43-25 of the ITAA 1997). The expenditure on these types of items is capital expenditure for which a deduction is allowable over 40 years at the rate of 2.5% per annum. You are entitled to a capital works deduction for your share of the cost of these items.