Private ruling: Rental property repairs
Published: April 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim as a repair the expenses incurred replacing the rain heads and downpipes at your commercial property? | A1: No. | Q2: Are you entitled to claim as a repair the remainder of the expenses incurred in undertaking work to the roof of your commercial property? | A2: Yes.

Relevant facts and circumstances: You own a commercial property which was purchased several years ago. The property suffered water damage after the roof failed to keep the building water-tight and weather-proof. An investigation of the roof found that insufficient roof fall contributed to the flooding and corrosion currently occurring. Work undertaken to repair and replace some of the roof involved: • Remove roof sheets and fit new commercial roof sheeting as required • Remove guttering and install new guttering and piping • Repair condensate piping and direct to new downpipes The roof sheeting has been replaced with its current commercially available equivalent. The downpipes were corroded and were allowing water to enter the building. The size of the rain heads was increased and the downpipes were increased.

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

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. To be eligible to claim such an expense you must be holding the property for the purpose of gaining or producing assessable income, and the expenses must not be capital in nature. Repair costs are deductible where they are incurred during the period the property is held for income producing purposes and are attributable either to damage that occurs during your income producing use of the property or to defects that emerge suddenly during that time. 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. Replacement of a subsidiary part or an entirety An 'entirety' is defined as something 'separately identifiable as a principal item of capital equipment' ( Lindsay v. FC of T (1961) 106 CLR 377 at 385). 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'. Repair or improvement 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. Application to your circumstances In your case, the commercial property suffered water damage after the roof failed to keep the building water-tight and weather-proof. The replacement of the gutter downpipes and rain heads with larger downpipes and rain heads is considered to be capital in nature because their installation will not restore the efficiency of function but add additional function by improving drainage and, in so doing, enhance the market value of the property. The costs associated with this work are considered to be an improvement and capital in nature and therefore not deductible as a repair. It is considered that the work undertaken on the roof sheeting is not an initial repair or the replacement of an entirety and does not go beyond restoring the efficiency of function of the roof. Therefore, you are entitled to a deduction as a repair for the work undertaken on the roof sheeting.