Private ruling: Rental repairs
Published: October 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for the expenses incurred recladding your rental property? | A1: Yes.

Relevant facts and circumstances: You own a rental property. Due to the properties location and the weather conditions it is subject to, the exterior of the house is rotting away and has deteriorated since the property has been rented. The property is currently covered in cladding which was in good condition when the property was originally rented. You wish to reclad the entire house.

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, to the extent that the expenditure is not capital in nature. Taxation Ruling TR 97/23 Income tax: deductions for repairs 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 than 'repair', or • the work is an initial repair. In your case, the work undertaken is not considered to be an initial repair or the replacement of an entirety. Therefore it is only necessary to determine if the work undertaken was an improvement rather than a repair. In order to determine whether a repair is an improvement it is necessary to consider the degree to which the work done restores the efficiency of function of the property. Some of the factors which indicate an improvement as opposed to a repair include: • the modification work has effected an improvement to the asset; • there is greater efficiency of function of the property; • there is an increase in the value of the asset; • the expenditure reduces the likelihood of future repairs. The 'efficiency of function' test was applied in Case R102 , 84 ATC 676 (Case R102). In that case, the taxpayer owned a rent producing property consisting of shops and weatherboard flats. Several rotting boards were replaced in one exterior wall and instead of repainting the boards the taxpayer had the whole wall covered with 'Celluform' cladding. The cladding required little or no maintenance. It was held that the cladding of the wall was a repair. The view was taken that there was no structural alteration or improvement in the use of the new cladding. The use of the cladding was to restore efficiency in function rather than exact repetition of form or material. The expenditure was not of a capital nature, despite the fact that the cladding might obviate the need for repainting the wall in future. Your situation can be likened to that in Case R102. It is considered that the cladding which will be used to replace the existing cladding will constitute a repair as the change in material will not enable the property to perform its function more efficiently than previously. The work will merely restore the original function to the exterior of the property. Therefore you are entitled to a deduction for the expenses incurred under section 25-10 of the ITAA 1997.