Private ruling: Rental property- replace damaged roof
Date of advice: 11 December 2017
Published: April 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for the cost of replacing the damaged roof on your rental property with another roof? | A1: Yes.

Relevant facts and circumstances: You are the sole owner of residential property rented continually since purchase. The house was constructed over 90 years ago, and the original roof was in good and sound condition and fully fit for purpose when the property was purchased over 15 years ago. You replaced the roof, gutters and bargeboards with the modern equivalent material, as original materials had not been made for many years. This was as a result of the roof leaking and water damage in the previous two years. Contractors advised that a partial repair was not an option, as the roof deterioration would progress rapidly now that the leaking and cracking had begun.

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. However, subsection 25-10(3) of the ITAA 1997 does not allow a deduction for repairs where the expenditure is of a capital 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. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. 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. An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201), Paragraph 40 of TR 97/23 specifically states that a roof is only part of a building and does not constitute an 'entirety'. The building itself is the 'entirety’. In your case, your rental property roof had deteriorated and was leaking, resulting in water damage. It is accepted the use of the modern equivalent of the roofing material constitutes a repair as the change in material will not improve the efficiency or function of the property. The roof will merely be repaired by its modern equivalent which restores the original function. Therefore, you are entitled to a deduction for the cost of replacing the roof of your rental property under section 25-10 of the ITAA 1997. Additional information: it is noted that the guttering and bargeboards have been replaced at the same time as the roof. It is accepted that these are an integral part of the roofing structure which, given the age of the building, it would be impractical to expect these to be reused when the roof is replaced.

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