Private ruling: Property expenses
Published: July 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you eligible to claim a capital works deduction for the cost of replacing the roof on a property before you brought it? | A1: No.

Relevant facts and circumstances: You purchased a residential property which you intend to rent out. The property was built over 30 years ago. The property had the roof replaced by the previous owners approximately 12 months before you purchased it. The property was occupied by the previous owners at the time the roof was replaced. The previous owners had owned the property for at least two years before replacing the roof. The new roof was not an improvement on the old roof. The new roof was not an initial repair.

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

Reasons for decision: Summary: Capital works deductions for structural improvements are available for the cost of constructing capital works after 26 February 1992. In order to be eligible for a capital works deduction the expenditure must be of a capital nature. In determining whether the cost of replacing a roof on a property would be eligible as a capital works deduction it must first be determined whether the replacement of the roof would have been considered to be a repair. 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 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, 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. The word 'repair' is not defined within the taxation legislation. Accordingly, it takes its ordinary meaning. 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. | Detailed Reasoning - Improvement or 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, addition or alteration 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. For example, in Case 51 (1960) 9 CTBR (NS) 328, it was held that the replacement of a galvanised iron roof with concrete roof tiles was a repair as it did little more than meet a need for restoration. The material in question was designed to perform substantially the same function as that which it replaced. | Detailed Reasoning - Your situation: In your case, the removal and replacement of the roof is not considered an initial repair or a renewal or reconstruction of the entirety, and it is considered the replacement of the roof did not improve the efficiency or function of the property. Therefore, as the replacement of the roof is regarded as a repair, it cannot be capital works. As the roof replacement is not capital works, you are not entitled to a capital works deduction for the cost of the roof replacement.