Private ruling: Rental property expenses
Published: December 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to claim a deduction for repairs on the following work carried out to your rental property? o replaced back door and stairs o repair front door jamb o row of skirting tiles in bathroom o replace sliding doors and pelmets o repair guides to doors, loose floor boards, fix light and switch, replace fibro outside kitchen window o supply and fix tile splash back to kitchen o replace timber sill o tiling front entry o repair concrete path o supply and lay gravel under meter box | A1: Yes | Q2: Are you entitled to claim a capital works deduction for the following work carried out to your rental property? o replacing of vanity o replacing of kitchen cupboards | A2: Yes

Relevant facts and circumstances: You purchased an investment property and it has been rented for a number of years. You terminated your tenants lease as the property was unfit for living due to damage to the property from flooding. The costs for these repairs were covered by an insurance claim. You later found that the property required further repairs due to the flooding but your insurance company refused to pay. You had the following work carried out due to flood damage and wear and tear: o replaced the kitchen o replaced back door and stairs o repair front door jamb o replace old vanity in bathroom o row of skirting tiles in bathroom o replace sliding doors and pelmets o repair guides to doors, loose floor boards, fix light and switch, replace fibro outside kitchen window o supply and fix tile splash back to kitchen o replace timber sill o tiling front entry o repair concrete path o provide and lay gravel under meter box The property has since been tenanted. You have provided a copy of a tax invoice detailing the work undertaken.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 43-10

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. 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 Pty Ltd 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 indicates that expenditure for repairs to property is of a capital nature where: o the extent of the work carried out represents a renewal or reconstruction of the entirety, o the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than 'repair', o the work is an initial repair. Replacement of a subsidiary part or an entirety TR 97/23 at paragraph 38 considers that a property is more likely to be an entirety if: · the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; According to paragraph 39 of the TR 97/23, property is more likely to be a subsidiary part rather than an entirety if: · it is an integral part of some larger item of plant; · the property is physically, commercially and functionally an inseparable part of something else. In the case of W Thomas & Co Pty Ltd v. FC of T (1965) 14 ATD 78; (1965) 115 CLR 58, which involved a claim for general repairs to a building, it was said that the question was not whether the roof or floor or some other part of the building, looked at in isolation, was repaired as distinct from wholly reconstructed, but whether what was done to the floor or the roof was a repair to the building. | Detailed Reasoning - Repair or improvement: TR 97/23 states that with a repair, 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. It involves bringing a thing or structure into a more valuable or desirable state or condition than a mere repair would do. Paragraph 16 of TR 97/23 states that to repair property, improves to some extent the condition it was in immediately before the repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10 of the ITAA 1997. In your case, you have a rental property that has been tenanted. Due to flooding and wear and tear you have incurred the following costs to repair the damage to your property: o replaced back door and stairs o repair front door jamb o row of skirting tiles in bathroom o replace sliding doors and pelmets o repair guides to doors, loose floor boards, fix light and switch, replace fibro outside kitchen window o supply and fix tile splash back to kitchen o replace timber sill o tiling front entry o repair concrete path o supply and lay gravel under meter box The expenses that you incurred were to restore the property to its original state and function. You have not renewed or reconstructed an entirety. The work done does not provide substantial improvement. The above items are not considered to be capital in nature. Therefore, you are entitled to a deduction for these repairs. | Detailed Reasoning - Capital works: You were required to replace the kitchen cupboards and vanity in your rental property. Kitchen cupboards are separately identifiable representing an entirety in themselves and the replacement of these results in an improvement or a renewal or reconstruction of an entirety. They are fixtures and therefore, a part of the building because they satisfy the 'degree of annexation' and the 'object of annexation' tests that are generally applied to determine whether there is a fixture at common law. The kitchen cupboards are not in place simply by their own weight but are fixed with the intention that they shall remain there indefinitely. Similarly, the vanity in the bathroom also is considered to be a capital improvement rather than a repair. Therefore, an immediate deduction is not available under section 25-10 of the ITAA 1997 for the replacement of kitchen cupboards and vanity. However, 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. The rate of deduction for capital works for a residential rental property is 2.5% of construction expenditure over 40 years. Therefore, you are entitled to a deduction for capital works under section 43-10 of the ITAA 1997 for the kitchen cupboards and vanity.

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