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

Ruling: Q1: Are you entitled to a repairs deduction for the works undertaken on your rental property? | A1: No. | Q2: Are you entitled to a deduction for the removal and safe disposal of the asbestos guttering at your rental property? | A2: Yes.

Relevant facts and circumstances: You purchased a rental property. You undertook the following works on the property: 1) removal and safe disposal of deteriorating asbestos guttering. The asbestos guttering was replaced with safe guttering of identical dimensions and function. 2) Waterproofing/repair of leaking shower 3) Repair and sealing of porous roof tiles Your pre-purchase building inspection identified all these issues as warranting attention by way of repair.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-755

Reasons for decision: Summary: You are not entitled to a repairs deduction for the work carried out as they are initial repairs and are therefore capital in nature. You are entitled to a deduction for the removal and disposal of the asbestos guttering as it is an environmental protection activity. | Detailed Reasoning - Detailed reasoning: 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 discusses the circumstances in which expenditure incurred for repairs may or may not be an allowable deduction under section 25-10 of the ITAA 1997. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. 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 (paragraph 15 of TR 97/23). While some works may be fairly described as repairs, the expenditure will be considered capital in nature in some situations, and therefore not deductible under section 25-10 of the ITAA 1997. Expenditure incurred for repairs to property used for income producing purposes is of a capital nature where: 1. the works result in a greater efficiency of function in the property, therefore representing an improvement rather than a repair; or 2. the extent of the work carried out represents a renewal or reconstruction of the entirety, or 3. the work is an initial repair. | Detailed Reasoning - Initial Repairs: If work is carried out to remedy defects, damage or deterioration that existed at the date of acquisition it is considered an initial repair and any expenditure incurred is considered capital in nature. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred. The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration: (a) existed at the time of acquisition of the property; and (b) did not arise from the operations of the person who incurs the expenditure. It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. An initial repair is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit yielding structure. It is capital expenditure and is not deductible under section 25-10 of the ITAA 1997. In your circumstances you purchased a rental property which was rented out shortly afterwards. Your pre-purchase building inspection identified that these issues warranted attention by way of a repair. As the work done was to repair defects existing when the property was acquired, the repair is considered an initial repair and therefore, capital in nature. As a result, you are not entitled to a deduction for the cost of the works undertaken under section 25-10 of the ITAA 1997. | Detailed Reasoning - Environmental protection activity: Section 40-755 of the ITAA 1997 allows a deduction for expenditure, including expenditure of a capital nature, incurred on or after 30 June 2001 by taxpayers for the sole or dominant purpose of carrying on eligible environmental protection activities. These activities are the preventing, fighting or remedying of pollution (which includes contamination of the environment by harmful or such potentially dangerous substances as asbestos) in the circumstances specified in paragraph 40-755(2)(a) of the ITAA 1997. Also included are activities in treating, cleaning up, removing or storing of waste in the circumstances specified in paragraph 40-755(2)(b) of the ITAA 1997. The pollution or waste must be of, on or from a site on which the taxpayer carried on, carries on, or proposes to carry on an activity for the purpose of producing assessable income. A deduction for undertaking environmental protection activities is not allowable for the construction of a building, structure or structural improvement or for an extension, alteration or improvement to a building. In your case, removing and disposing the asbestos guttering of a rental property that is used to produce assessable income constitutes an eligible environmental protection activity as it remedies an environmental pollutant. The asbestos guttering was removed and disposed with the sole or dominant purpose of preventing pollution of the site of your income earning activities. Also this work is not considered to be an extension, alteration or improvement to the building as it is merely replacing the asbestos with a safe material of identical dimensions and function. Therefore you are entitled to a deduction under section 40-755 of the ITAA 1997 for the expense incurred in removing and disposing the asbestos guttering on your rental property.