Private ruling: Rental deductions - capital works vs repairs
Date of advice: 2 July 2021
Published: September 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 2019

Ruling: Q1: Are you entitled to an immediate deduction for the carpentry expenses incurred for the balcony rectification? | A1: Yes. | Q2: Are you entitled to an immediate deduction for the plumbing expenses incurred for the balcony rectification? | A2: Yes. | Q3: Are you entitled to an immediate deduction for the expenses incurred for property maintenance? | A3: Yes. | Q4: Are you entitled to an immediate deduction for the plumbing expenses incurred for the bathroom rectification? | A4: Yes.

Relevant facts and circumstances: You own a rental property. The property was purchased in March 20XX and settlement took place a few weeks later. The property has been consistently rented out since April 20XX except for the period XXXX to XXXX. The property was not occupied while repairs were carried out. The property is managed by an agent. All rectification works to the property were undertaken and paid for in the year ended 30 June 20XX. Balcony You were alerted by the tenant of cracks in the cornice of the balcony. Plumbers advised that there was a water leak coming from the roof and repaired the problem. Two months later the tenant reported the same issue. The plumbers attended again and advised that the balcony needed re-grouting and re-caulk. Some months later the tenant reported the same issue again. The plumbers advised that the balcony waterproofing had failed, and that the balcony needed to be waterproofed. When lifting the balcony tiles the plumbers discovered that the joist holding the balcony had rotted away and needed to be replaced. Work carried out was as follows: • Carpentry work consisted of: - remove existing yellow tongue floor and floor joists - prop the ceiling in the living room - supply and install new floor/ceiling joists connected to a wailing plate along house with joist hangers and to sit existing wall plate on other side. - screw plaster back to new ceiling joists - all patching of plaster - remove existing floor and joists from site - supply and install aqua floor to area costing • Plumbing work consisted of: - remove all tiles and debris and rough edges waterproof area - install new outdoor balcony, tiles and grout area Property maintenance Due to the plaster damage from the balcony and shower leak the plaster and cornice had to be replaced and then painted. The body corporate insurance paid $XXX as $XXXX was charged for excess. Shower You were alerted by the tenant of a water stain in the living room under the shower. The plumbers advised that the waterproofing had failed, and the shower needed to be waterproofed. Once the work had commenced it was discovered that the structure under the shower had partially rotted away. Work carried out was as follows: • completed demo of bathroom and temp removal of vanity • replace section of the floor • installed new shower base • installed plaster sheeting • installed waterproofing • lay cement sheet and tiled walls and floor • completed the fit off of the new shower enclosure • corked all areas and cleaned site

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10

Reasons for decision: Summary: The necessity for the work undertaken arose due to water leaking into the property at a period when it was producing assessable income. The property was rented out when you were advised of the issue. Therefore, a deduction is available for repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997). 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. 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. 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 or wall is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety'. The structural repairs are therefore not capital. In your case, you have owned the property for a number of years. It has been rented to tenants for the majority of that period. You have conducted structural repairs to the veranda and bathroom due to a water leakage. Your property is used for income producing purposes and the work completed is not the replacement of an entirety and are not an improvement. Therefore, a deduction is allowable under section 25-10 of the ITAA 1997.

This ruling applies for the following period periods :