Private ruling: Rental property expenses - repairs
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for repairs to your rental property when it has previously been used as your main residence? | A1: Yes

Relevant facts and circumstances: You own a residential property which had previously been your main residence. You moved out of the property and commenced renting it to tenants during the relevant financial year. You continue to rent out the property. During the subsequent financial year you incurred repair expenditure. The repairs comprised rendering and plastering an existing wall, painting that wall, and repairs and painting to the roof, gutters, fascia and gables.

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 allows a deduction for expenditure for repairs to premises or depreciating assets held or used solely for the purpose of producing assessable income. Taxation Ruling TR 97/23 deals with deductions for repairs. Paragraph 15 of TR 97/23 states that 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…through the passage of time." Paragraphs 76 and 77 of TR 97/23 state the following: 76. In appropriate circumstances, expenditure for repairs can qualify as a deduction even though the property has previously been held, etc., by the taxpayer for non-income purposes. This situation is different from an initial repair done to newly purchased or newly leased property, where the repair expenditure is capital expenditure. 77. A deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income purposes: (a) even though the property has previously been held, etc., by the taxpayer for non-income purposes; and (b) even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer's holding, etc., of the property before its holding, etc., for income purposes; and (c) provided that the repair expenditure is not capital expenditure. In your case, you commenced renting your property on during the relevant financial year and continue to let the property. You incurred repair expenditure after your property became available for rent. In accordance with the above, even though you previously used the property as your main residence, you are entitled to claim a deduction for these repairs, provided they are not of a capital nature. Your repairs would be considered of a capital nature if they were an improvement rather than just a repair. The meaning of repairs is considered in paragraphs 12 to 30 of TR 97/23. In the case of a 'repair', broadly speaking, 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 - usually in some existing function. It 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. In your case, none of the repair work which was undertaken is considered an improvement as it is merely restoring the items to their previous state. As the repairs are therefore not capital in nature, and occurred during the period the property was available for rent, the entire amount of the repairs is a deductible expense.