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

Ruling: Questions and answers: | Are you entitled to an immediate deduction for the replacement of wardrobes and painting in your rental properties? | Yes. | Are you entitled to an immediate deduction for replacing the kitchens in your rental properties? | No. | Are you entitled to a capital works deduction for the replacement of your kitchen cupboards in your rental properties? | Yes.


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

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 legislation. Accordingly, it takes its ordinary meaning. In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR; (1965) 14 ATD 78; 1965 9 AITR 710 ( W Thomas &Co case), 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 a property is of a capital nature where: · the work is an initial repair; or · the extent of the work carried out represents a renewal or reconstruction of the entirety; or · the work results in an improvement in the property rather than a repair. | Detailed Reasoning - What is entirety?: In the W Thomas & Co case , 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. Paragraph 40 of TR 97/23 describes a building as the entirety, and something that is part of the building, such as a roof or wall is considered to be a subsidiary part rather than the entirety. | Detailed Reasoning - Repair: 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. Paragraph 45 of TR 97/23 distinguishes between a 'repair' and an 'improvement' to property which one needs to consider the effect that the work done on the property has on its efficiency of function. In your case, you are required to carry out work on your units due to water damage. The work involves replacing the kitchen cupboards in the units along with replacing the wardrobes in each of the three bedrooms in the two units along with painting the units out. As the back of the wardrobe are part of the walls of the house, the replacement of the wardrobe doors and sides does not change the structure of the house or bedrooms. It is considered that the replacement does not constitute a replacement in its entirety. The work done has brought the wardrobes back to their original state/condition and are repairs. As such, they are fully deductible in the year the costs are incurred. The replacement of the kitchen cupboards are separately identifiable representing an entirety. Therefore you are not entitled to a deduction under section 25-10 of the ITAA 1997 for the replacement of the kitchen cupboards. You are able to have a deduction under section 25-10 for the cost of painting both units out. | Detailed Reasoning - Capital Works: 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. Section 43-10 of the ITAA requires that: · the capital works has an area in which capital works is carried out, the work is begun after 30 June 1997, and the expenditure incurred is for capital works that are owned or leased by the taxpayer section 43-75 of the ITAA 1997; · there is an amount of construction expenditure incurred that is attributable to capital works area ( section 43-85 of the ITAA 1997); and · The construction area must be used in a deductible way at some time during the year of income for the purpose of producing assessable income. Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997). You are replacing the kitchen cupboards including pantries in your units. 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. Therefore, an immediate deduction is not available under section 25-10 of the ITAA 1997. However, you are entitled to a deduction for capital works under section 43-10 of the ITAA 1997 for the kitchen cupboards.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You have rental properties. | Your properties were damaged by flood waters. | Your properties need the kitchens and wardrobes replaced. | Your properties need painting inside.