Private ruling: Rental property expenses
Date of advice: 30 November 2015
Published: February 2016
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a repairs deduction under section 25-10 of the ITAA 1997 for the work carried out to the kitchen cupboards and kitchen appliances in your rental property? | A1: No. | Q2: Are you entitled to claim a capital works deduction for the kitchen cupboards and a capital allowance deduction for the kitchen appliances for your rental property? | A2: Yes.

Relevant facts and circumstances: You purchased an investment property in 200X and it has been rented until 20XX. During the 20XX financial year the property was damaged by the tenants. You received an insurance recovery amount in relation to the damage. You spent funds on repairs to restore the property to its original condition. You included items of a capital nature in the repairs, including the replacement of the kitchen cupboards, as well as the replacement of kitchen appliances including a dishwasher.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 20-20 | Income Tax Assessment Act 1997 Section 25-10 | Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Section 40-285 | Income Tax Assessment Act 1997 Section 40-295 | Income Tax Assessment Act 1997 Section 43-25

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 explains the circumstances in which deductions for repairs are allowable. TR 97/23 states that what is a repair for the purposes of section 25-10 of the ITAA 1997 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property. The ruling further states that repairs mean the remedying or making good of defects in, damage to, or deterioration of, property. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Taxation Ruling TR 97/23 Income tax: deductions for repairs (TR 97/23) indicates that expenditure for repairs to property is a capital nature where: • the extent of the work carried out represents a renewal or construction 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. 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. It is acknowledged in TR 97/23 that to repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement may be done to property and still be a repair. However, 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. That is, where work done to a property goes beyond what is a repair, any expenditure for the work is not deductible. The kitchen cupboards are regarded as separately identifiable capital items with their own function and are therefore an entirety in themselves. Their replacement is a renewal of an entirety and the expenditure is not deductible as a repair under section 25-10 of the ITAA 1997. The expenditure is capital in nature. 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. Subsection 43-25(1) of the ITAA 1997 states 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). 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. The kitchen cupboards are not in place simply by their own weight but are fixed with the intention that they shall remain there indefinitely. The expenditure is capital in nature and not a deductible repair ( Lindsay v Federal Commissioner of Taxation (1960) 106 CLR 377; 12 ATD 197; (1960) 8 AITR 99). However the expenditure is regarded as construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997. Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. When a depreciating asset is destroyed, a balancing adjustment event occurs (section 40-295 of the ITAA 1997). The amount of the balancing adjustment is calculated by comparing the asset's termination value with its adjustable value (section 40-285 of the ITAA 1997). The termination value of a depreciating asset that is lost or destroyed is the amount or value received or receivable under an insurance policy or otherwise for the destruction. Please ensure that the insurance proceeds received for your dishwasher or other items are included in your balancing adjustment calculations. For details on how to calculate the allowable depreciation deduction, please refer to the Australian Tax Office's Guide to depreciating assets which is available on the website www.ato.gov.au. The dishwasher is regarded as a depreciating asset for Division 40 of the ITAA 1997 purposes. A deduction for its decline in value is an allowable deduction when it is used for income producing purposes. Please note the dishwasher is a capital item and therefore not deductible as repairs under section 25-10 of the ITAA 1997.