Private ruling: Rental property expenses - repairs
Published: July 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the cost of rewiring your property? | A1: Yes.

Relevant facts and circumstances: You own a rental property. You recently had a number of licensed electricians provide a quote to install residual current devices (RCD's) at your property. You were prompted to install the RCD's due to a legislative requirement. You were advised by the electricians that the existing wiring in your property was too old and deteriorated to allow them to install the RCD's. They advised you that the existing wiring was made with rubber insulated cables and should be replaced with new PVC insulated wiring that does not deteriorate with age such as your existing wiring has. You were advised that the deteriorated wiring is at the end of its lifespan and may cause an electric shock or fire if it was not replaced.

Relevant legislative provisions: Income Tax Assessment Act Section 8-1 | Income Tax Assessment Act Section 25-10

Reasons for decision: Summary: 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. 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. The word 'repair' is not defined within the taxation legislation. Taxation Ruling TR 97/23 states that the word 'repair' ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property. In W Thomas & Co v. Federal Commissioner of Taxation (1965) 115 CLR 58; (1965) 14 ATD 78; (1965) 9 AITR 710 , 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 property is of a capital nature where: · the extent of the work carried out represents a renewal or reconstruction of the entirety · 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. If expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue (paragraph 48 TR 97/23). If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. However, if the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement. In your case, the wiring in your property is rubber insulated cables and you have been advised by licensed electricians that the wiring is at the end of its lifespan and has deteriorated. The electricians have recommended that you have your property rewired with new PVC insulated cables. You had initially contacted the electricians to install RCD's to comply with legislative requirements, however the electricians advised that the wiring would need to be replaced irrespective of the need to install RCD's to your property. Although you intend to replace the wiring with a different material, it is considered that the PVC insulated cables are the modern equivalent of the existing cables and the use of the new cables will not alter the efficiency or function of the property. Accordingly, the rewiring of your property is considered a repair and a deduction is allowable under section 25-10 of the ITAA 1997. | Detailed Reasoning - Further issues for you to consider: Any electrical work that goes beyond simply rewiring your property to replace the deteriorated cables, such as the addition of any power points or additional lighting, will go beyond a repair and may be considered an improvement. Additionally, the cost to have the RCD's installed will not be considered a repair.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.