Private ruling: work to rental property

Ruling: Q1: Are you entitled to a repairs deduction for the work undertaken on your rental property? | A1: 

Relevant facts and circumstances: You own a two storey unit. The unit was rented out soon after it was purchased. The ground floor of the unit sustained damage due to flooding. Up until this time, the property was being rented. The insurance company declined the claim of the insurance, as the policy did not cover for flooding. You therefore paid for the work to be carried out on the unit. You have stated that the expense was to restore the unit to its original state and no modifications were carried out to the foundation of the building where the unit is located. Your builders estimated the refurbishment as including the following work: · removing existing plasterboard wall linings and re-lining · conducting an internal and external site clean · doing new timber skirtings throughout and new timber door and window architraves where required (internal doors only) · removal and re-installation of the existing door hardware · new joinery through where there is water damage and re-using the existing stone benches · supply of floor tiles · supply and installation of floor carpet, and · painting of doors, skirtings, architraves and new and existing plasterboard wall lining. The work has been completed. Since this time, the unit as been placed on the market for rent. However, it has not been re-tenanted as yet. Several other units in your unit complex suffered water damage.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10 and | Income Tax Assessment Act 1997 Section 25-10(3).

Reasons for decision: Summary: You are entitled to a deduction for the cost of the work undertaken on your unit, which was damaged in a flood. The work is considered to be a repair as the unit was restored to its original condition. The costs are not capital in nature as the work was not a renewal or reconstruction of the entire unit. | 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. Subsection 25-10(3) of the ITAA 1997 precludes a deduction for repairs where the expenditure is of a capital nature. The word 'repair' is not defined within the tax legislation. Accordingly, it takes its ordinary meaning. 'Repair' involves a restoration of a thing to a condition it formerly had without changing its character ( W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58. Taxation Ruling TR 97/23 deals with the issue of deductions for repairs. TR 97/23 provides 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 (paragraphs 36-42), or the works result in a greater efficiency of function in the property, therefore representing an 'improvement' rather than a 'repair' (paragraphs 44-58). An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. Federal Commissioner of Taxation (1960) 106 CLR 377 at 385). | Detailed Reasoning - Application of the above to your situation: Your unit was available for rent soon after being purchased. Among others in the complex, your unit sustained water damage as a result of a flood. It had been tenanted up until this point. You incurred expenses to restore the unit to a condition where it could be rented. Some of the work conducted on the unit included fixing the wall plasterboard, replacing timber skirting and providing/ installing flooring material (tiles and carpet). Case V2 88 ATC 107; AAT Case 4012 (1988); 19 ATR 3038 concerned partial underpinning of a rental property caused by excessive drying of the subsoil. It was found that the foundations were restored to their former efficiency in function without the essential character of the foundations being altered. The repairs to the foundations were not capital in nature, as they did not change the nature and character of the building and as such were deductible as repairs. Similarly in your case, the information you provided shows that the work undertaken was not a renewal or reconstruction of the entirety as only various sections of the property had to be fixed, not the unit structure itself. The work to be completed will restore the property to its former efficiency in function and would therefore not be considered an improvement to the property. The costs you incurred are for a repair and are not capital in nature. Therefore, you are entitled to claim a deduction for the expenditure incurred in repairing part of the property.

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