Private ruling: Rental property deductions
Date of advice: 2 September 2016
Published: October 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Are you entitled to a deduction for the costs incurred to renovate your bathroom as a result of moisture damage? | Yes. | 2. Are you entitled to a deduction for the costs incurred repairing the moisture damage to a bedroom and brick work at your rental property? | No.


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 43

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing the assessable income. 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 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 Income tax: deductions for repairs (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 construction 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 for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as 'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time. The cost of replacing items such as locks and exhaust fans, which are permanent fixtures installed in premises used for income purposes, is deductible as a repair under section 25-10 of the ITAA 1997, provided it is a replacement of a worn out unit by a new unit of a similar design that simply restores its efficiency of function and is not an improvement. In your case, the works undertaken in renovating the bathroom are considered to be a repair and not capital in nature. The work undertaken to repair brickwork and damage to a bedroom, for which your insurer is covering the cost, is not an allowable deduction as you have not incurred the expense. Therefore, a deduction under section 25-10 of the ITAA 1997 is only allowable for the bathroom renovation. | Detailed Reasoning - Capital expenses: Division 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. A deduction is only available for the number of days that a property is rented, or available for rent, in any income year from the date that the works are completed. A capital works deduction is generally claimed at a rate of 2.5% over 40 years. The works at your rental property that have been carried out are considered repairs they are not capital expenses.

Relevant facts: You own a rental property. | You purchased the property post CGT. | On # your property manager advised you that your tenant thought there was a water leak in the shower due to damage to the bedroom wall and outside brickwork. | The damage was not present or reported when a property check was conducted prior to purchasing the property. | Your insurer assessed the damage on # and found that it was the result of water escaping from the shower and the absence of waterproofing. | The bathroom had not been renovated for a period of over 20 years. | Your builder recommended a complete renovation as waterproofing would need to be done to the entire bathroom. | The following work was completed: | Tiling & waterproofing the entire bathroom - floor and walls | Replacement of vanity and sink | Replacement of tap fittings for sink | Glass frame of shower replaced by tiled walls | Your insurer approved and paid the claim only for the brickwork and moisture damage to a bedroom (not yet completed). | The property was and continues to be tenanted.