Private ruling: Repairs and Improvements
Date of advice: 17 August 2017
Published: November 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for repairs under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for your portion of the costs incurred for the following expenditure incurred for your rental property? ● Roof ● Gutters and Downpipes ● Brickwork ● Concrete works ● Plumbing works ● Waterproofing concrete roofs ● Balconies ● Balcony Balustrades ● Windows and balcony doors ● Façade and associated works – Existing metal surfaces ● Foyer and common stairs | A1: Yes | Q2: Are you entitled to claim a capital works deduction under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) for your portion of the costs incurred for the following expenditure incurred for your rental property? ● Fascia/Barge Boards ● Rendering ● Façade and associated works – Works associated with rendering ● General external painting | A2: Yes | Q3: Are you entitled to claim an environmental protection deduction under section 40-755 of the Income Tax Assessment Act 1997 (ITAA 1997) for your portion of the costs incurred for replacement of the eaves boards? | A3: Yes

Relevant facts and circumstances: You have owned a unit in a strata levied unit complex in City X since 20XX. This property is being rented for residential living. The strata levied unit complex required major remedial works. The building inspection report outlining the required maintenance and repairs was completed in the 201X income year. Prior to this report, you were not aware of the works required. The strata management company issued special levies in the 201Y income year. You paid the special levy in two instalments in the 201Y income year. During the works, the units remained available for tenancy at a reduced rate. The roof exceeded its lifespan and was replaced with its modern equivalent due to water penetration issues. The gutters and downpipes were replaced with a modern equivalent due to being corroded. The Fascia/Barge Boards were replaced with a superior product to remove long term maintenance costs. The eaves boards were replaced with a modern equivalent due to being asbestos. The brickwork was repaired due to spalling, deterioration, corrosion of broken tiles and erosion. The brickwork was rendered which is an addition to the original state of the brickwork of the building. Concrete works were conducted to repair significant concrete spalling. No improvement was made to efficiency or function. Plumbing works were conducted to repair corroded plumbing. No improvements were made to efficiency or function. New waterproofing was put on the concrete roofs due to the existing waterproofing being damaged. The balconies were repaired due to significant concrete spalling. No improvements were made to efficiency or function. The balcony balustrades were replaced with relevant balustrades to allow for the continuity of the membrane system to the balcony slab. Previous brick balustrades are no longer permitted under the Building Code of Australia. Balcony doors were replaced as part of the waterproofing works for the balconies. There was no increase to efficiency or function. Windows were replaced due to waterproofing issues. There was no increase to efficiency or function. Façade and associated works were deteriorated and replaced with its modern equivalent. General external painting was completed as part of the rendering process. Foyer and common stairs was repainted and new balustrades were added.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-10. | Income Tax Assessment Act 1997 Division 43. | Income Tax Assessment Act 1997 section 40-755

Reasons for decision: Summary: The strata management company of your rental property complex has levied a special contribution to fund repairs to the entire complex. The character of an expense follows the purpose for which the expense was incurred. It follows that if the levy is used to fund expenditure which would be deductible then the contribution made is also deductible. To determine if your special levy contribution is deductible, we first need to look at what the levy monies will be expended upon and the deductibility of those expenses. You have advised the levy was used by the body corporate to undertake major remedial work to the complex. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. However there are also provisions in income tax laws which deal with specific deductions, including repairs and capital works (Section 25-10 and Division 43 of the ITAA 1997). Section 25-10 of the 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 , 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 - An improvement: An 'improvement' involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its sale-ability or market value or extend the property's expected life. | Detailed Reasoning - An entirety: TR 97/23 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. A thing or structure is more likely to be an entirety if it 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. | Detailed Reasoning - Initial repair: 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 fixing an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred. | Detailed Reasoning - Capital works: Section 43-10 of the ITAA 1997 provides a deduction for capital expenditure on capital works used to produce assessable income. A deduction under section 43-10 of the ITAA 1997 is based on the amount of construction expenditure. This is defined in subsection 43-70(1) of the ITAA 1997 as capital expenditure incurred in respect of the construction of the capital works. Capital works includes buildings and structural improvements and also extensions, alterations or improvements to buildings and structural improvements. Initial repairs are also considered capital in nature and are therefore capital works. Improvements to items that form part of the structure of a rental property and that are attached to the building are considered structural improvements within the definition of Division 43 of the ITAA 1997 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% over 40 years. You cannot deduct an amount for any period before the completion of construction of the capital works even though you used them, or part of them, before completion (section 43-30 of the ITAA 1997). This means you can only deduct capital works when the work was completed and paid out of the special purpose fund by the strata management company. | Detailed Reasoning - Roof – Repair: In your case, the replacement of the roof constitutes a repair as the change in material did not improve the efficiency or function. The roof has merely been repaired by its modern equivalent and restored the original function. W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58 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. TR 97/23 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. 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'. The replacement of the roof is therefore not capital. TR 97/23 states that work done in anticipation of forthcoming defects or deterioration can be considered a repair where it is done in combination with the rectification work. Therefore, the replacement of the roof is not the replacement of an entirety and is not an improvement. Your rental property is used to produce assessable income and as such the costs incurred for the replacement of the roof are deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Gutters & Downpipes - Repair: In your case, the repair of the gutters and downpipes constitutes a repair as the change in material did not improve the efficiency or function. The gutters and downpipes have merely been repaired by its modern equivalent and restored its original function. The gutters and downpipes are a subset of the building itself as they are unable to provide a useful function by themselves and are not considered to be of an entirety. Therefore, the gutters and downpipes are deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Brickwork – Repair: The brickwork would be considered a repair when it was repaired 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. The brickwork was repaired due to erosion, spalling and the accumulation of debris or mortar which was causing moisture issues to internal skin of the brickwork. It would not be considered an entirety as the brickwork alone is not capable of providing a useful function separate from the property itself. This would be considered a repair and is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Concrete works - Repair: In your case, the concrete works would not be considered an improvement as it was simply done to restore the concrete spalling. It would not be considered an entirety as the concrete alone is not capable of providing a useful function separate from the property itself. This would be considered a repair and is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Plumbing works – Repair: In your case, re-plumbing your rental property would not be considered an improvement as it was simply done to restore the property's plumbing. It would not be considered an entirety as the plumbing alone is not capable of providing a useful function separate from the property itself. This would be considered a repair and is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Waterproofing concrete roofs - Repair: The existing waterproofing is damaged and requires replacement to restrict water entry and to protect it against future concrete spalling. There was no improvement to efficiency or function, and it is not of an entirety. This work is considered a repair and is deductible under section 25-10 of the ITAA. | Detailed Reasoning - The Balconies – Repair: The balconies are required to be treated due to concrete spalling and waterproofing. There was no improvement to efficiency or function. It would not be considered an entirety as the balcony alone is not capable of providing a useful function separate from the property itself. This work is considered a repair and is deductible under section 25-10 of the ITAA. | Detailed Reasoning - Balcony Balustrades - Repair: The balcony balustrades where replaced as required as part of the brickwork removal to allow for the continuity of the membrane system to the balcony slab. It would not be considered an entirety as it is not capable of providing a useful function separate from the property itself. To constitute a repair for the purposes of section 25-10 of the ITAA 1997, work done to meet requirements of regulatory bodies must satisfy the general repair principles. Work done solely to meet requirements of regulatory bodies is not a 'repair' for the purposes of the section. Previous single brickwork balustrades are no longer permitted under the building code so was repaired with its modern equivalent. As this was a requirement due to the remedial works to the brickwork and balcony, this work is considered a repair and is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Windows and balcony doors - Repair: The windows were original to the building and required replacement due to waterproofing issues. There was no improvement to efficiency or function from its original condition, and is not considered to be of an entirety. This work is considered a repair and is deductible under section 25-10 of the ITAA 1997. The balcony doors were replaced as part of the waterproofing works for the balcony. There was no improvement to efficiency or function from its original condition, and is not considered to be of an entirety. This work is considered a repair and is deductible under section 25-10 of the ITAA. | Detailed Reasoning - Foyer & Common Stairs - Repair: The foyer was repainted and new balustrades were added. There was no improvement to efficiency or function from its original condition, and is not considered to be of an entirety. This work is considered a repair and is deductible under section 25-10 of the ITAA 1997. | Detailed Reasoning - Façade and associated works – Apportion between Repair and Improvement: There is ongoing deterioration and of the existing metal surfaces. There was no improvement to efficiency or function from its original condition. This work is considered a repair and is deductible under section 25-10 of the ITAA 1997. All work associated with rendering of the building is considered an improvement and a deduction can be claimed under Division 43 of the ITAA 1997. | Detailed Reasoning - Fascia/Barge Boards - Improvement: The fascia & barge boards were replaced with a superior product to remove long term maintenance costs. These works were not essential and are considered an improvement as the works involved bringing them to a more desirable condition. Therefore, you can claim a capital works deduction under Division 43 of the ITAA 1997. | Detailed Reasoning - Rendering - Improvement: The building was previously not rendered, therefore the rendering and associated brickwork is an improvement as it will bring the building to a more valuable and desirable condition. It would not be considered an entirety as the rendering alone is not capable of providing a useful function separate from the property itself. Rendering is considered an improvement, which you can claim a capital works deduction under Division 43 of the ITAA 1997. | Detailed Reasoning - General External Painting – Improvement: All work associated with rendering the property is considered an improvement, which you can claim a capital works deduction under Division 43 of the ITAA 1997. | Detailed Reasoning - Eaves Boards – Environmental protection: The eaves boards are asbestos and therefore were replaced with a material that did not improve their efficiency or function. Work done to property in controlling health risks associated with the use of dangerous substances (such as asbestos) does not qualify as a 'repair' for the purposes of section 25-10 unless the work remedies or makes good defects in, damage to, or deterioration of the property. As there was no existing damage to the eaves boards and the reason for replacement was solely due to asbestos, it is not deductible under section 25-10. Section 40-755 of the ITAA 1997 provides a deduction for expenditure you incur for the sole or dominant purpose of carrying on environmental protection activities. Environmental protection activities are listed in subsection 40-755(2) of the ITAA 1997, and includes preventing pollution of or from the site of your earning activity (subparagraph 40-755(2)(a)(ii) of the ITAA 1997). As the expenditure is incurred entirely for an environment protection activity, namely, removing pollution from a site on which the company carries on its income producing activities, it is deductible under section 40-755 of the ITAA 1997.